Merryn's Blog

Who really pays corporation tax? The workers of course

As protesters insist that big companies pay more tax, it's worth noting that it won't be the shareholders who will have to stump up. As always, it will be the workers.

Is it possible for a company to pay tax? Or is all tax in the end actually paid by people?

This is an old academic argument that has been brought back into discussion since UK Uncut started having a go at the many UK companies who appear to pay almost nothing in tax Barclays, Vodafone and the like. It is worth revisiting.

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The idea is that in the end the burden of tax can only be borne by different groups of people; owners, who can find their businesses worth less than it would be in a lower tax environment; employees, who find they either get paid less or nothing at all as taxes go up; suppliers, who might find they get their price cut; and customers, who might find that as tax goes up so do prices.

So while companies might make the actual cash transfer to HMRC, they are simply the middleman for turning over more of our money to the government. The relevant question then is: who ends up bearing most of the burden?

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Unfortunately most of the research on this it is known as "tax incidence" suggests it is the workers. This blog written back in 2010 lists the main academic work on the subject, with the general conclusion being that "higher corporate taxes are typically associated with lower wages."

How much lower? A study of European countries shows that "92% of any rise in corporation tax falls upon wages." It might be more and might be less for individual countries, but the basic point stands corporation taxes are paid mainly by labour not the owners of capital (shareholders). The same appears to go for employer National Insurance contributions. Individuals like to hear that company taxes are going up they think it is saving them from shouldering the burden themselves. But all this rather suggests it isn't. It doesn't matter which tax goes up the worker pays it in the end.

This isn't to suggest that there should be no such thing as corporate taxes (although you can make an argument for it if you really fancy upsetting the left). But it does suggest that if you want to be sure of taxing capital you need to find another way taxing dividends and inflation-adjusted capital gains at the same rate as other income might be a start, irritating as it would be for MoneyWeek readers. It also suggests that the debate stimulated by UK Uncut should be slightly reframed to reflect the fact that the more tax they succeed in making our big corporates pay, the more those they are trying to help may get hurt.




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