Who Actually Pays Corporate Income Taxes?

February 24, 2014

Regular people are the ones who ultimately pay corporate income taxes, says Philip Cross of the Fraser Institute.

When governments need a revenue source, many people turn immediately to corporations, thinking that the corporate income tax is an easy way to bring in more money. Many see the corporation -- a big, profitable business that can stand to pay the taxes -- as an ideal revenue source. But it is ultimately consumers, workers and investors who bear the cost of corporate income taxes:

  • A corporate income tax is already a form of "double taxation," as corporate profits are already taxed when they are paid out in dividends.
  • The tax also hurts workers. When corporations face a high income tax, they take steps to offset that cost, often by lowering labor costs. This could mean lowering wages or even shifting operations to places with lower taxes, causing workers to lose jobs entirely.
  • Lastly, corporations can also choose to offset their taxes by increasing their prices, passing on the tax to consumers in the form of more expensive goods and services.

Despite the fact that the corporate income tax is always passed on to individuals, it has proven a difficult argument politically, as people are persist in their belief that it is unfair to allow corporations to operate untaxed. If abolishing the tax is politically impossible, at the very least, governments should seek to lower the income tax on corporations as much as they can.

Every percentage point increase in corporate tax rates erodes the tax base. In fact, one study found that every one point increase in tax rates results in a drop of 13.6 percent in the corporate tax base. This illustrates how easily businesses can simply move their operations to lower-tax jurisdictions to avoid paying exorbitant rates.

The biggest hurdle to overcome in resolving the corporate income tax situation is public perception of the fairness of corporate income taxes.

Source: Philip Cross, "Corporate Income Taxes -- Who Pays?" Fraser Institute, January 2014.

 

Browse more articles on Tax and Spending Issues