North Carolina Sales Tax Shift Could Help Workers

This article originally appeared in the Fayetteville Observer.

A change in North Carolina’s tax code is coming this year. The most likely outcome will be a reduction in the reliance on our state’s income taxes and more of a reliance on an expanded sales tax.

Critics complain the new tax structure would ask too much of low-income earners. Such criticism, however, does not stand up to careful economic analysis. The reality is that the income-tax system unfairly burdens workers, and modernizing it will help them.

The current tax code, founded on heavy reliance on a progressive income tax, is at least partly to blame for North Carolina’s economic stagnation and fifth-highest unemployment rate in the nation. Most assuredly, our tax code hits low-income, low-skilled Tar Heels hardest by stifling growth.

More specifically, a concept universally accepted by economists is the difference between who remits a tax payment and the actual incidence of the tax burden. In other words, the person or business writing the check may feel less of an impact than other people.

Most notable is the reality that corporations do not pay taxes, people pay taxes. As the Tax Foundation, a Washington, D.C.-based research organization, explains, “People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people – the owners, customers, or workers of the corporation.”

In short, “corporations” can’t pay taxes any more than your house can write a check for the property tax. Corporations are merely a collection of individuals legally organized to produce a good or deliver a service. Taxes on businesses are really taxes on these individuals and consume resources the organization could allocate toward other purposes.

Passing the buck

Many observers make the claim that such taxes are merely “passed along to consumers” as companies raise prices to compensate for the added burden. This common notion, however, fails to reflect economic realities.

Businesses cannot arbitrarily raise prices. Rather, prices are determined by what consumers are willing to pay for a specific product, regardless of a company’s tax bill. Therefore, corporate taxes can only be “passed along to the consumer” to the extent that the market will bear a price increase.

The real victims of corporate taxation? Workers. As the Tax Foundation states, “New research is indicating that in a global economy, where capital is highly mobile but workers are not, labor is bearing the brunt of corporate taxation.”

For instance, a September 2007 study produced by the Oxford University Centre for Business Taxation studied data from more than 15,000 companies in four countries. The study found that more than 60 percent of corporate taxation is “shifted onto the workforce in the form of lower wages” in the short run, growing to 100 percent in the long run. In other words, over the long haul, every dollar extracted from businesses in the form of taxation reduces worker pay an equal amount.

Making matters worse, the negative effect of corporate taxation on wages falls hardest on lower-skilled workers and those on the margins of employment. Moreover, the unseen effects of business taxation also include the jobs that were never created because taxes siphoned off the money needed for businesses to grow.

In short, eliminating the state corporate income tax would not just be a “break to big business,” it would eliminate a tax burden that hits lower-skilled, low-income workers hardest.

Furthermore, the actual tax incidence of the state’s high marginal personal income tax rates also falls heavily upon our state’s most economically vulnerable people.

Top-earner reactions

Top income earners are not stationary targets. They respond to high taxes by reducing their work effort or investment, shielding their income by taking advantage of the tax laws, or leaving for another state that doesn’t punish their effort as punitively. For instance, after Maryland passed an onerous tax on “millionaires” in 2007, the state saw a net decrease in population migration of 31,000 in three years – with their wealthiest counties experiencing the greatest percentage population losses.

And because so many of these high-income earners are business owners, they take their jobs with them.

Best for all

Bottom line: The attempt to tax high-income earners leaves the rest of us who are still remaining in the state with fewer opportunities and a greater share of the tax burden. Once again, the true burden falls heaviest on lower-skilled, lower-income households.

North Carolina’s current tax structure already forces the bulk of the burden upon the poor and working people, through limited opportunity and suppressed wages. The best way to lift up workers and poor people is to shift to a pro-growth tax structure that will usher in more jobs and bigger paychecks.