The Myth Of Corporate Taxes

This is a companion piece to this week’s episode of “Two Minutes Out Of Your Life.”

Wait a sec…

There is no such thing as corporate taxes. Oh, there are fees assessed to a corporation’s earnings. There is an “official” tax bracket
assigned to the net income of all business, and corporations in particular are assigned a top rate of 39.1%. How our government came up with that is anyone’s guess.

You pay all ‘corporate taxes’… as well as your own.

The corporate tax rate has been the subject of much discussion between large business entities and the federal government. A huge debate has been underway for years with respect to corporate funds parked in oversea accounts. Liberal politicians will tell you that this is immoral, and that these funds should be transferred to accounts in the United States so that the earnings can be taxed. Conservatives will counter with a demand to lower the tax rate so that the earnings can be brought back and used to create private sector jobs instead of funneling it into the maw of the federal government.

Those who know me will rightly guess that I stand firmly in favor of lowering tax rates. Not just on corporations of course, but on everyone.

I know corporations are not my friend. These faceless, soulless entities exist for one reason and one reason alone: to generate revenue for their owners. They are not there to give you or me a job. They do not build factories and warehouses to provide a “service” to the community.

But that’s not fair… can’t we make them?

Now once in a while, you’ll see a business partnering up with the Red Cross or the local university to hold a blood driver, and sometimes they’ll sponsor a playground in the neighborhood. In fact if it’s large enough, a business will have an accounting line devoted to ‘community outreach,’ all in the name of ‘giving back’ good public relations, otherwise known as ‘advertising.’ Yeah, they’re not doing it for you. But you know what? They shouldn’t have to.

It irritates me to no end to hear a fellow citizens complain with respect to corporations not paying their “fair share.” Because there is no such thing. And it angers me to hear a politician talk the issues, because they should know better. I say ‘should,’ but when we have at least one member of congress inquire whether or not the Mars Rover was able to take a picture of the flag planted on the Martian surface, I’m not so sure.

But most of them know. They know that corporations don’t pay taxes.

It’s not magic?

This is easy to understand once you internalize that corporations generate their income in exchange for goods and services. Goods and services. One or the other, and sometimes both. All goods and services have costs attached to them. And this cost always, always represents someone’s time. And time, as is often noted, is money. Few give their time away for nothing in a free market under a liberal democratic republic. There is always charitable work with its roots in the Judeo-Christians ethic. But beyond that, if you are giving away your labor for free, then you more often than not have a gun to your head and working in the kind of society Marxist dream about.

When the cost of a good or a service is artificially raised – such as imposing a tax or an additional regulation, then the additional cost is born by the various stakeholders throughout the process of delivering the product:

1. The owners of the company will see a commensurate lowering of their profits. In the case of corporation, the dividends to the stockholders will be cut. Some shares will be owned directly by individuals with no middlemen. Other shares are indirectly owned through a mutual fund or pension plan, but at the end of the line, are still owned by people.  People with families, 401Ks, and mortgages to meet every month.
2. The employees of the company will bear the cost in whole or in part through a smaller compensation package than they would otherwise. Salaries and benefits are artificially kept lower.
3. Customers will pay artificially inflated prices for the product. The additional costs of taxes and regulations make their way through the pipeline and are paid for  by the end-user with a swipe of their debit card.

In other words, every cost associated with the product, whether incurred through the production and delivery, taxation, or by regulation is figured into the final product and passed down to the customer. The immutable law of economics at work. It is how businesses stay in business. When a corporation is taxed and regulated to the point where costs become so prohibitive that the customer will no longer bear them, then the corporation goes out of business.

Is this what we mean by “public-private partnership?”

So no, corporations most certainly do not pay taxes. They do however, act as agents for the government by collecting them from you. Sales taxes are merely on the surface. A plurality of the taxes on each good and service – the size and percentage of which varies depending on the business – are also ultimately paid by the end-purchaser. The efficiency of collection also varies, and if the business fails in its obligation to extract the required taxes from its owners, customers, and employees, then the consequences are potentially catastrophic. Large corporations are equipped to employ legal and tax departments to  streamline the collection process on behalf of the government – another expense embedded into the cost of the product. Medium and small companies on the other hand will often find themselves in an abusive relationship with the government should they fail to collect the required revenue from their stake holders.

Regardless, our politicians will continue to demagogue the myth of corporate taxes because it’s an easy sell and it garners votes.

The legendary Milton Friedman was excellent at explaining the laws of economics for the average person. I would recommend investing a few minutes to take a look.

I also highly recommend getting a hold of the classic essay ‘I, Pencil’ by Lawrence Reed. A review and a synopsis by Kevin Williamson can be found here.

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