Tuesday, April 20, 2021

Taxes Part 3 -- Who Pays the Corporate Income Tax?

Last week I wrote about corporate income taxes and focused mostly on changes over time and presidential terms. 

One astute reader of the blog commented to me that another perspective looks at who actually pays the corporate income tax. 

For example, your mother gets mad at you and then you slug your brother. The impact of your mother's scowl is on your little brother...or your sister. I don't want to be sexist here.  

It is the same thing with taxes and corporations. Let's say that your company produces canned tuna. The government decides that the owners of Charlie's Tuna Factory are rich and they should pay more taxes to the government. Clearly, the government reasons, they can do much better things with the cash than Charlie. 

So bam Charlie gets hit with a bigger tax bill. 

Charlie and his lamb-like accountant Jack put their heads together and decide how to deal with the tax increase.

Charlie feels guilty because he recently installed a plastic pool in his backyard and he is the rave of his neighborhood. Life is good for his family. He tells Jack to pay him a smaller dividend so the government can do better things with his money. 

Jack laughs so hard that he worsens his double hernia. 

"Charlie, don't be a fool. You deserve all that money you make. There are lots of other ways to find the cash to pay the extra taxes." Tuna is all ears. 

Here is what Jack said.

    Don't give your workers a raise this year. That will give you more money for taxes.

    Reduce the benefits you pay those workers.

    Fire some of your workers -- you can get by without a lot of them. Make the rest work harder and longer. 

    Give a lot less to the United Way and other charities this year. 

    There are lots of tax write-offs besides charity we can use to offset the increased taxes.  Take a trip to Paris to search for better tin cans and enjoy good wine and coffee. 

    Support politicians who will help you reduce taxes down the road.

    Get tough on your suppliers. You don't need to pay so much for oil or for tin. 

    Your sales staff do not need those luxurious Chevy Vegas. Bicycles would provide better health benefits than that silly expensive healthcare plan. 

I could go on but you get the picture. The corporation writes the check to the IRS each year but the real issue is who REALLY "pays" the tax. As you can see, it is not just the stockholders who will pay the extra taxes.me 

I tried to bring in some data on this topic. Personal dividend income surged from 2010 to 2020. It rose 239% compared to the decade before. Most of that increase came before 2015. During those two decades, personal income rose by only 79%. It is hard to see any real bump from Trump's lower corporate tax rates on dividend income. Trump becomes President in January of 2017 and his tax bill is signed in December of 2017. Dividends do rise in 2018 compared to 2017 but that increase appears to be the continuation of a trend of increases that started as early as 2012.

Are we sure that the extra trillions in taxes proposed by Joe Biden are going to be used by government in ways that are better for the country than the alternative uses?




8 comments:

  1. The T in the word EBIT stands for taxes and most entities will value the business by using the EBIT x a factor common to that industry or marketplace. This factor can be 1% on up to 15% depending on the marketplace and risk. Like expenses (E) which serves as a counter balance and is part of the taxed entity the valuation can definitely shape the value and transaction thereafter. Yes, tax reductions go to increase earnings unless those deductions are used in a certain way that increase earnings and net value. As we have frequently seen government use of the revenue is not close the the rate of return on the expenditure before. Good for politics though? The real return is the use of the amount of tax sheltered in the company or spent by the Government.

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  2. Larry-- I have the sense that you might have been a bit rushed in producing this week's thoughts. The "solutions" that Jack proposes seem to me to be, for the most part, quite out of the realm of tax considerations. Businesses make decisions to provide/not provide raises, keep or reduce benefits, hire/fire workforce, take ( honest) business trips, to pressure/negotiate with suppliers, and to provide Vegas or bikes, based on what it takes to maintain and improve one's competitive position, including the type and skill set of the desired workforce. Taxes, while important at the margins, would not stop a well run business from achieving its strategic goals.They are just another cost element that one hopes to optimize using any and all of the gifts that the legislature provides, whether meant for your business or not. If a business was able to achieve one or more of the suggested solutions with no impact to its business goals, then it should be done--(amost) regardless of the tax considerations.

    I think the question in the last paragraph is well worth asking--just don't see the connection with the argument.

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    1. As always, thanks for your view. The conclusion is related to the former point because a taking by the government would be less offensive if it didn't negatively affect firms and their stakeholders. As to the first point, I think it is an empirical question that is not easily answered. I was making a general point. Higher tax rates for business, impact more than just rich stockholders. You believe the impacts are smaller than I believe. Maybe we could resolve the issue over beers on Sanibel some day!

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    2. Larry--Been thinking about your response. Not sure I do or do not believe that tax impact is larger or smaller than you might believe. What I do know from years in the corporate sector and having been involved in some cases in thinking about tax strategies is that taxes are a tool to be both tolerated and exploited. They are, however, subordinate to the strategic tools which Jack enumerates, in your hypothetical, and touts as steps to be taken. No one, except perhaps the leader of an "already in trouble" business, would entertain the steps proposed in response solely to a tax challenge.

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    3. Ed, I appreciate y our personal experience but there is a whole area of economics on the topic of tax incidence. The key point is that tax increases are not confined to only impacting those who pay the tax bill. I checked with several sources and it is a legitimate claim. For example I went to Wikipedia and found some good ideas. https://en.wikipedia.org/wiki/Tax_incidence

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  3. Dear LSD. Tuna don’t have ears. The several actions Jack mentions to ‘pay’ for the tax increase suggest the payment can be spread over many of my Factory’s stakeholders—e.g. workers, charities, suppliers, etc. And even me—ouch! TV talk’n headz say my customers will pay fer the increase via higher prices (You allude to this at the end of a paragraph with .me) but Jack doesn’t offer that option—I guess I need to fire his butt cuz I’m think’n now he ain’t all that smart. But suppose my prices increase. On the surface one could say I pass’d on the tax increase. But wut if my suppliers increased their prices (as many of those talk’n TV hedz say will occur due to impending inflation) and I passed those onto customers. Back to the surface: How would you land lubberz know if my price increase to customerz wuz due to the tax increase, the supplier price increase, or both, or other reasonz?

    You conclude your commentary by ask’n if Hid’n/Ly’n/Plageriz’n Biden will spend the proposed proceedz of the tax increase ‘wisely’ (sic), which is a different question than “Who’s gunna pay for the tax increase?” The former question is rhetorical: Answer = of course not. The latter question’s answer = TBD and only the Shadow knowz.

    BTW, Jack is now sitt’n home on his fired butt collecting unemployment and stimmilus checks.

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    1. Dearest Tuna, Good point about the tax-induced price increase. I totally ignored that one. My main point is that a tax increase does not just impact rich folks. Those who have to pay a higher prices for tuna will surely be impacted too. Jack had a job?

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    2. He is currently unemployed cuz I fired his butt. Maybe he can find employment in macro?

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