WHO REALLY PAYS?
January 14, 2005
The current tax system imposes heavier taxes on income used for saving and investment, and on the formation of human capital, than on income used for consumption. These tax disincentives to save and invest, to work and take risks have consequences, says economist Stephen Entin.
Ironically, many of the taxes targeted at wealthy entrepreneurs get passed on to others, explains Entin.
- Corporate Income Tax: Shareholders are the first to bear the burden of such taxes, but they are eventually passed on to workers (in the form of lower wages) and consumers (higher prices).
- Payroll Tax: Though employers are supposed to pay half the tax, in reality, the entire burden falls on workers (in the form of lower wages) because the whole tax must come out of gross labor compensation.
- Death Tax: The elderly attempt to avoid this burden by reducing personal saving and capital accumulation, which ultimately lowers the stock of capital and thus also job opportunities and wage rates.
These adverse effects strongly urge us to dispose of the current income tax structure and replace it with a flat rate tax that is neutral in its treatment of saving and consumption. A tax system that is saving-consumption neutral would lead to a significant increase in income across the board, says Entin.
Source: Stephen J. Entin, "Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax?" Institute for Research on the Economics of Taxation, September 10, 2004.
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