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.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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?
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Is the stock market open on Christmas?
‘Tis the season for stuffing stocks – here’s what investors need to know if the UK stock market is open for trading on Christmas
By Oojal Dhanjal Published
-
Annual UK rent jumps £3,240 since Covid, says Zoopla
Zoopla finds rental costs have risen 27% since 2021, with rental costs far outstripping wages over that period
By Chris Newlands Published
-
Beating inflation takes more luck than skill – but are we about to get lucky?
Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
By Merryn Somerset Webb Published
-
Rishi Sunak can’t fix all our problems – so why try?
Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
By Merryn Somerset Webb Published
-
Young people are becoming a scarce resource – we should value them more highly
Opinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Ask for a pay rise – everyone else is
Opinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
By Merryn Somerset Webb Published
-
Why central banks should stick to controlling inflation
Opinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
How St Ives became St Tropez as the recovery drives prices sky high
Opinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
By Merryn Somerset Webb Published
-
The real problem of Universal Basic Income (UBI)
Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
By Merryn Somerset Webb Published
-
Why an ageing population is not necessarily the disaster many people think it is
Opinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
By Merryn Somerset Webb Published