Who Pays The Corporate Income Tax?

May 5, 2014

Almost 60 percent of the corporate tax burden falls on workers, according to a report from Ben Southwood, Head of Policy at the Adam Smith Institute.

Who ultimately shoulders the burden of the corporate income tax? While the corporation technically "pays" the tax, those costs are passed on to others. Southwood reviewed 45 of the most major studies on the matter, all of which come to different conclusions on the precise breakdown of the tax burden.

  • Ultimately, the report concludes that the tax burden is split between workers and capital.
  • Workers' wages are reduced to pay for the tax, and on average, research indicates that workers hold 57.6 percent of the tax burden.
  • Significantly, most workers are entirely unaware that their wages are lowered by the tax on businesses.
  • If workers realized just how much the corporate income tax actually impacts them, Southwood writes, lawmakers might be able to round up significant support for tax reform.

The remaining burden, which falls on capital, reduces business investment, negatively impacting the economy and hurting long-term growth.

Regardless of the breakdown of the tax burden, most economists agree that the corporate income tax should go. According to a National Center for Policy Analysis Tax Analysis Center study by Laurence Kotlikoff, Hans Fehr, Sabine Jokisch and Ashwin Kambhampati, "Eliminating the U.S. corporate income tax has the potential to raise the welfare of all U.S. generations. Remarkably, this is true even if other regions follow America's lead and set their corporate tax rates to zero."

Source: Ben Southwood, "Who Pays Corporation Tax," Adam Smith Institute (U.K.), 2014. Laurence Kotlikoff et al., "Simulating the Effects of the U.S. Corporate Income Tax," National Center for Policy Analysis, January 2014.

 

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