Corporations do not pay Taxes

With all of the current hoopla about corporate tax rates, I thought that it would be useful to help everyone understand that corporations do not pay income taxes. This is because a corporation is simply a legal structure used to define the relationships between the owners, workers and customers of the corporation. It is what is commonly referred to as a “legal fiction”.

In many ways a corporation is just like a marriage. Your marriage defines the legal relationship between you and your spouse, but there is no way for us to implement a “marriage tax” that would be paid for by somebody other than you and your spouse. Similarly, any taxes we impose on a corporation’s income will not be paid for by the “corporation”, but by the people within the legal structure of the corporation (i.e. the owners, the workers or the customers).

Since taxes are expenses, if we decide to raise the corporate tax rate, business leaders will essentially have three choices when it comes to dealing with the added expense. Option 1: They could choose to just “eat” the higher expense and accept that the corporation will be less profitable. Option 2: They could choose to raise their prices in an effort to bring in more revenue. Option 3: They could choose to lower some of their other expenses in order to offset the additional expense.

Since business leaders have been trained to maximize profits, they will be very resistant to option 1. It will essentially be their last choice.

Since we live in a global economy with a seemingly unlimited supply of goods and services to choose from, it is extremely difficult for business leaders to choose option 2. If they raise the price of their goods or services, customers are too likely to decide to buy elsewhere.

Thus the only attractive option is option 3. And what is the largest expense in most corporations?  Wages and benefits.

Over the past several decades we have seen corporate profits rise rather dramatically, while the ability of corporations to raise prices has declined (as reflected in our generally declining rates of inflation). Meanwhile, the wages and benefits paid to the working class have been under tremendous pressure. 

From this it should be clear to you that it is the workers in this country that bear most of the burden of our misguided attempts to tax corporate income.

Today we have millions of people who complain about their low income, but at the same time they clamor for higher taxes to be inflicted upon corporations. But raising corporate taxes would only serve to put even more downward pressure on their own income. Now that, Miss Morissette, is ironic!

Hopefully at some point we will get enough people to understand this and we can move away from the ignorant belief that we should tax a corporation’s income and move towards the more constructive belief that we should tax corporations for not investing in our economy (i.e. we should tax them on their Retained Earnings).

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.