Mar 09 2011

Gauke’s porkies, corporate taxes, and the ‘incidence’ hoax

Posted by: Nick Shaxson in: Thoughts

This month David Gauke, Exchequer Secretary to the UK Treasury, made a speech to the Hundred Group, a British business lobbying organisation, in which he said a lot of things. One set of his comments was an effort to defend plans for what George Monbiot rightly called “the biggest and crudest corporate tax cut in living memory . . . a kind of corporate coup d’etat.”

But the purpose of today’s blog is to highlight something else he said, in an attempt to underpin his subtle arguments that we should sweep away (or at least sharply minimise) all these pesky taxes on poor corporations. Here is the offending passage:

“People believe – or at least give the impression they do – that corporation tax is somehow a victimless tax, not paid by real people. Of course, as with any tax, the incidence will ultimately fall on someone. As far as corporation tax is concerned, the question is whether the burden falls on shareholders (largely in the form of pension funds) employees (through lower wages) or consumers (as a result of higher prices). The consensus, among economists at least, is that it’s predominantly the employee who foots the bill.

And it is testament to the lack of understanding of this fact that – when this point was made to a member of UK Uncut on Newsnight – his response was to say that this demonstrated the unfairness of the tax system. It is rather like someone complaining about the law of gravity if an apple fell on his head.”

Well, he certainly gets full marks for sneering. But if you examine what he says closely, the arguments simply fall away.

This is the hoary old “tax incidence” argument – an argument that taxes don’t really fall on corporations, that they fall on people – that is, the argument goes, on employees. And the argument comes with a subtext: therefore cut, or get rid of corporation taxes.

It’s a very, very slippery one. But it can be dealt with, head on, and cut to the ground. There are lots of angles from which to attack it.

Here is perhaps the most important. I will quote liberally here from a most useful new document on corporate taxation, published by the Institute on Taxation and Economic Policy (ITEP,) a sister organisation to Washington-based Citizens for Tax Justice. It presents what is probably the single most killer argument to neutralise the members of the ‘incidence brigade,’ as some call people like David Gauke. Here it is.

“The corporate income tax serves as an essential backstop to the personal income tax. Without the corporate tax, much of the income of wealthier Americans would go entirely untaxed, as individuals could easily shelter their personal income by putting it in a corporate form.”

Or, as the New York Times put it recently:

“If the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.”

So you see, you can’t consider the corporate income tax in isolation and just say ‘it’s a bad tax that falls on labour’. You have to consider it as part of a whole tax system. And when you do, the entire picture changes.

Not only that, but the bigger the divergence between corporate income tax and the top rate of personal income tax, the more shifting of income into the corporate category will occur. For this reason, countries try to keep the two rates – corporate and personal income tax rates –  near enough to each other. Because of this shifting of income, the more that you force your corporate income taxes downwards, the more pressure you will face to force the top rate of personal income tax down. And the less progressive your tax system will be. And regarding the progressive nature of the corporate income tax, ITEP have a word to say:

“The corporate income tax is one of the most progressive taxes a state can levy. Since stock ownership is concentrated among the very wealthiest taxpayers, the corporate income tax falls primarily on the most affluent residents of a state. As the chart on this page shows, the wealthiest one percent of Americans held just over half of all corporate stock in 2007, while the poorest ninety percent of Americans owned just 10 percent of the total.”

See their graph, here.

Now bear in mind that these points have, in effect, rendered Gauke’s argument irrelevant, and revealed the ‘incidence’ argument to be a hoax: a slippery lobbying tool to get the tax burden shifted off the backs of rich folks and onto the shoulders of those least able to bear it.

Oh, and there is this other thing. When Gauke says that “The consensus, among economists at least, is that it’s predominantly the employee who foots the bill,” he is simply not telling the truth. Here are two quotes which paint a very different view, demonstrating that such a consensus simply doesn’t exist. ITEP notes:

“Economic research generally indicates that for the most part, it tends to be borne by corporate shareholders.”

And here’s a report from the US Congressional Budget Office (CBO):

“Capital bears the majority of the corporate tax burden”

And another new one from March 2011 (p173):

“the extent to which the financial burden of the tax ultimately falls on the owners of corporations, owners of all capital assets, or workers is unclear.”

So when Gauke states as fact (and he’s not alone in doing this) that it’s the consensus among economists that the incidence of the corporate tax falls on labour, then he’s simply telling porkies (translation for those not familiar with Cockney rhyming slang: porkies = porky-pies = lies, or fibs.)

In fact, there is a whole range of arguments that undercut the siren songs of the incidence brigade, and which further ram the point home.

You can read some of them here. There is a selection of others written by Richard Murphy and others listed in the TJN A-Z archive, listed under ‘Incidence,’ here.

3 comments so far

Demetrius 3th March, 2011 3.49 pm

On “incidence” of borne costs you may take notice of the Kaupthing business that is now under way. For some aspects related to “incidence” see my post of today, Wednesday, 9th on “Arresting News”.

[…] Corporate taxes and the ‘incidence’ hoax Posted by: Nick Shaxson in: Thoughts […]

[…] from their latest fact sheet. It complements work we and others have done on this subject, such as this or this or, from a more economic perspective, this or this. CTJ Fact Sheet: Why We Need the […]

Leave a comment