Some of my ideas about how to look at the economy are original, to the best of my knowledge, although all are consistent with the Austrian School of economics. Others, however, are established mainstream concepts with implications that economists don’t seem to have fully considered.
One of those is “tax incidence,” which is about situations in which the tax burden is shifted to someone other than the intended target of the tax. For example, gasoline taxes are all paid by motorists in the form of higher prices, not the refiners or gas stations who are ostensibly targeted. Real estate taxes in a town with a tight rental housing market are quickly passed on from the property owners, the intended targets, to the renters as new, higher-priced leases go into effect.
Those are common examples, so economists and politicians should be well aware that a tax on one party can morph into price increases paid by others. Yet we know they don’t understand this, because the most intense part of any political tax battle is always who should be the target - corporations, rich people, foreigners, or someone else - and all that people talk about is who should be “paying their fair share” as if the burden of the tax doesn’t usually end up on someone else altogether.
Those someones, whose backs bear the cost of government regardless of who or what is taxed, is almost always lower income people, in the form of higher consumer prices, lower pay, and fewer good job opportunities.
In this post I’ll show why businesses ultimately don’t pay any taxes. Yes, they write big checks to the government, but it is their customers and employees who take the hit. In Part 2, I’ll cover the other ostensible targets, and show why no matter who they are, it is always the poor that pay for the government, in the form of lower living standards.
Taxes of all kinds and government cost impositions on businesses eventually morph into higher prices for customers and/or lower paychecks for employees. This is true even if companies do not face inelastic demand where it is easy to raise prices, like the gasoline and rent cases above.
Here how that works: Suppose US companies’ share of payroll taxes are increased substantially to temporarily save Social Security or Medicare, something inevitable as both programs are now heading toward bankruptcy. If a hypothetical company, XYZ Corp., has many foreign competitors not subject to the new tax and customers who are very price sensitive, it can’t get away with raising prices. If it often gets outbid for the services of its better employees, it can’t economize much on labor. Surely XYZ Corp. is exactly the kind of business politicians want, a tax target who must keep paying the new tax and can’t shift the cost to others, right?
Right initially, then wrong. XYZ can’t avoid eating the higher tax itself, but the story doesn’t end there.
What do XYZ’s owners think, now that its tax bill is higher? With an inability to raise prices or cut costs, this wasn’t a great business even before the tax increase. It might make sense to shut down the business and sell the assets, or maybe keep going while trying to sell it as a going concern. One thing they definitely won’t think is that it is a good idea to invest any more money in it.
What do XYZ’s bankers, who lend it money to finance receivables and inventory, think? They now view XYZ as much riskier. They may drop it as a client, or at least demand higher interest rates on the loans and restrictive covenants to be confident that, if XYZ is heading towards bankruptcy, the bank gets its money out first. The net effect is that in its industry, XYZ might disappear as a supplier, and definitely won’t be in a position to add to capacity.
Prices for everything and anything reflect the balance of supply and demand. The new tax’s effect on XYZ and other US competitors will be to decrease future supply from a lack of investment or financing, and possibly current supply if XYZ shuts down. That provides incipient upward pressure on prices. Prices may not go up much until something causes demand to get strong relative to remaining supply, but when they do, prices will go up more and stay up longer because XYZ is not providing more, or possibly any, supply.
If XYZ does go broke it won’t benefit from the higher prices caused by the increase in demand relative to supply, but customers will still have to pay the higher prices. What that means is that if higher taxes or other cost impositions on businesses don’t get paid by consumers in higher prices immediately, they will sooner or later. This must happen because taking taxes out of business profits will reduce available financing, which reduces investment, which reduces future supply, and the altered balance of supply and demand will then push prices up.
The higher prices affect every consumer regardless of income, but has much more effect on the living standards of those with lower income or wealth.
If that explanation of the process seems too theoretical to you, here is another way to get the same result, copied and pasted from my book:
To prove that businesses pay taxes and cost impositions only temporarily before foisting them off on others, imagine that a staunch Progressive from the early 1900s popped into a time machine and visited the present US. On arrival, the Progressive would be told just how heavy the taxes on businesses are now, how many benefits they are required to provide to employees, and all the new administrative rules and restrictions they must follow today to be allowed to operate.
The Progressive would conclude that profits must be zero, or close to it. Yet they aren’t. They are probably closer to the higher than the lower end of profit margin and ROI ranges that have existed for more than a century.
The Progressive might be baffled. But the explanation is simple. While businesses have their names on checks that are written to the tax authorities, on the salary checks of extra government-required administrators, and on the checks to law firms for advice to keep the company out of trouble with the government bureaucracy, they must have either raised prices to make their customers cover the extra cost or cut compensation to make their employees cover the cost, or some combination.
In other words, businesses never really pay taxes, nor do they pay the cost of any government impositions, except nominally and temporarily.