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Donald Marron

Workers bear the corporate income tax burden

Corporate income tax moves some capital abroad, which reduces worker productivity, wages and benefits, Marron writes. As a result, some of the corporate income tax burden falls on workers.

By Guest blogger / September 14, 2012

Carmine Sodora (L) of Tavern Tax prepares Peter Marafioti's income tax documents at Duffy's tavern in Hoboken, New Jersey in this April 2008 file photo. Workers bear an estimated 20 percent of the corporate income tax, Marron writes.

Joshua Lott/Reuters/File

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Corporations pay income taxes in an administrative sense: they write checks (or send electrons) to the IRS. But corporations can’t actually bear the burden – they are just legal entities, not living and breathing human beings.

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Donald B. Marron is director of economic policy initiatives at the Urban Institute. He previously served as a member of the President's Council of Economic Advisers and as acting director of the Congressional Budget Office.

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So who ultimately bears the burden of corporate income taxes? Shareholders? Employees? Customers?

Economists have struggled with this question for decades. When Mick Jagger dropped out of the London School of Economics in the 1960s, for example, he allegedly complained that “economists can’t even tell if corporations pay taxes or pass them on.”

We’ve made some progress since then. Over at the Tax Policy Center, my colleague Jim Nunns summarizes what economists have learned over the past five decades and describes TPC’s new approach to distributing the corporate income tax.

As Jim reports, our best estimate is that workers bear 20 percent of the corporate income tax,  shareholders bear 60 percent, and investors as a whole bear 20 percent. [Editor's note: This paragraph and a sentence two paragraphs down have been corrected. In the original, two figures were transposed.]

Workers bear some of the corporate income tax because capital can move around the world. All else equal, the corporate income tax encourages some capital to locate abroad rather than in the United States. That reduces worker productivity (since they have less capital with which to work) and thus reduces worker wages and benefits. As a result, some of the corporate tax burden falls on workers.

Investors in general bear a portion of the corporate income tax for a similar reason. When you tax corporations, you encourage capital to flow out of corporate equities and into other investments, including corporate debt and non-corporate businesses. That flow reduces the rates of return that investors earn in those other asset classes as well. Much of the corporate income tax thus gets passed on to investors in general, not just corporate shareholders.

Shareholders alone, finally, bear the portion of the corporate income tax that falls on “super-normal returns” — i.e., the returns they get in excess of a normal rate of return.

If any readers know Mick Jagger, please send him a link to the study. Maybe it will finally give him some satisfaction.

P.S. For another overview, see this TaxVox post by Howard Gleckman.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on dmarron.com.

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