Whose Fair Share is it Anyway?

This article was originally published in the Durham Herald-Sun.

How much tax do North Carolina corporations pay each year? Too much? Not enough? Try nothing. That’s right, not a dime.

Outraged? Let me explain. A concept universally accepted by economists is 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.

As this political season heats up, voters will no doubt get their fill of candidates declaring with righteous indignation that "Corporations must pay their fair share!"

But if corporations cannot pay taxes, who does end up paying this "fair share"?

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, does not reflect economic realities of the marketplace.

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.

Another common fallacy is the notion that corporate taxes are at least in part passed on to "wealthy shareholders" in the form of lower returns or dividends. For starters, it’s hard to argue that corporate taxes affect only wealthy shareholders when the majority of people reading this article are invested in a 401k. More to the point, empirical research shows this is not the case either.

The real victim 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 located 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. While politicians often express a desire to further cut income taxes for lower- and middle-income taxpayers, many of these taxpayers already have virtually no income tax burden. In reality, these taxpayers would benefit more from a cut in the corporate tax rate.

A 2007 Tax Foundation study examined the federal corporate tax burden on workers based on income level and determined that "a cut in corporate taxes would provide a greater benefit to low-income households than would more cuts in individual taxes."

Moreover, the unseen effects of business taxation are the jobs never created that otherwise would have been had the taxes not been in effect.

Currently, North Carolina’s corporate tax rate is the highest in the Southeast. Most businesses, however, organize as "pass-through" organizations and therefore file personal income taxes rather than corporate taxes. North Carolina’s top marginal personal income tax rate, often referred to as the "small business tax," is likewise highest in the Southeast. It should come as no surprise to learn that North Carolina’s personal income growth from 2000-2006 lagged far behind regional neighbors, as well as the national average.

One cannot lead the charge about corporations paying their fair share while simultaneously claiming to be in favor of working families. The evidence suggests that punishing businesses via taxation actually makes workers worse off.

In this election year, beware of pundits and politicians who say that corporations must "pay their fair share." More than likely, that share will be taken from your paycheck.