Some comments on tax incidence
By Scott Sumner
If corporations are greedy, why don’t corporations also pass corporate income taxes on to consumers? Why do most people seem to believe the opposite?
It’s disappointing that so many people uncritically accept the claim that taxes on corporations are absorbed by owners.
Consider the excise tax on gasoline, which is imposed on corporations like Exxon and Chevron. Is this tax on corporations absorbed by owners, or passed on to consumers? I think if you polled 100 economists and 100 non-economists, all 100 non-economists would claim that the excise tax on gasoline is passed on to consumers, whereas some of the economists would argue that the burden is shared between gasoline consumers and stockholders of the oil companies. (The economists are correct in this case.)
So it seems like the public is especially likely to believe that corporations simply pass taxes on to consumers. If asked why, I suppose they’d say something about big oil companies being “greedy”. OK, but then why doesn’t that apply to corporate income taxes? If corporations are greedy, why don’t corporations also pass corporate income taxes on to consumers? Why do most people seem to believe the opposite?
It’s obvious that peoples’ gut instincts on this question are completely useless. Most people believe that corporations pass gas taxes on to consumers, but absorb the corporate income tax. But if asked why, they’d be utterly incapable of providing any sort of coherent explanation.
So we are left with the views of economists. Surely they can answer this question! There must be some sort of economic model that tells us who absorbs the corporate income tax. Unfortunately they are lots of models, all very stylized and none of which are even remotely persuasive. Some models say workers absorb the tax, others say the opposite.
I don’t doubt that you can find polls that show that most economists believe that more than half of the corporate income tax is absorbed by owners. But I’ve seen polls that show that 95% of economists believe that fiscal stimulus is effective, despite overwhelming evidence that it is not. So much for polling economists.
I focus on efficiency, not distribution, because we really don’t know much at all about how to fix distributional issues and we know a lot about how to improve efficiency. If it was easy to improve living standards through distributional policies then the French would be better off than the Swiss, but actually the reverse is true. (Switzerland is richer and happier.) Progressives have no answer for why that is. I do have an answer; Switzerland has a much more efficient policy regime. For that matter, so does Sweden.
People who obsess about distribution think that there is a vast difference between living standards in Sweden and Switzerland. People who obsess about efficiency think that there is a vast difference in living standards between Switzerland and Venezuela. Which view seems right?
The graph may be hard to read. Eyeballing the data, it looks like G/GDP is about 33.5% for Switzerland, 37.5% for the US, 49.5% for Sweden, and 56.5% for France.