Economics Questions

Re: who ultimately pays taxes?

Fred Foldvary — Tue, 28 Feb 2012 15:46:09 GMT

That corporations do not pay taxes is trivially true in that the corporation is a legal construct, and so the burden is on natural persons: customers, employees, landowners, and shareholders. But the shareholders are the corporation, so by depressing the profits, corporations do pay taxes.

Re: who ultimately pays taxes?

MDay1985 — Tue, 28 Feb 2012 01:07:16 GMT

Thanks. That pig comment helped oddly.

Re: who ultimately pays taxes?

Graham Wright — Mon, 27 Feb 2012 21:16:01 GMT

This is a great question. David Friedman provides part of an answer here:

David Friedman:
The previous section started with the question of who really pays taxes. It seems we now have the answer. Using a supply-demand diagram, we can show how much of the tax is passed along to the consumer in the form of higher prices and how much appears as a reduction in the (after-tax) receipts of the producer. In any particular case, the answer depends on the relative elasticity of the supply and demand curves--on how rapidly quantity demanded and quantity supplied change with price, as indicated by the slope of the curves S and D on our diagrams.

We have answered a question, but it is not quite the right question. We know by how much the tax raises the cost of widgets to the consumer and by how much it lowers the revenue received by the producer for each widget he sells, but that is not quite the same thing as how much worse off it makes them. The cost to the consumer is not merely a matter of how much money he spends; it also depends on what he gets for it.

It's much more difficult to assess how much worse off various people are by taxation. It depends crucially on the time-span you're looking at. In the short-run, many people benefit from taxation (if this weren't the case, there'd be no point in taxation), until the economy adjusts. In the medium-run, who is made worse off by the tax depends on the elasticity of the good being taxed. In the long-run we are all made worse off by all taxation, and the costs are shared more evenly among everybody.

Re: who ultimately pays taxes?

Clayton — Sat, 25 Feb 2012 21:25:22 GMT

Corporations do not "pay" anything for the same reason that pigs do not pay anything - neither are human beings.

The question you're trying to ask is whether tax burdens fall on producers. The answer is, clearly, yes. Not all the costs of taxation can be passed on to the consumer.

Clayton -

Re: who ultimately pays taxes?

Groucho — Sat, 25 Feb 2012 20:27:41 GMT

When the mafia whacks someone in a restaurant, the owner doesn’t necessarily need to raise his prices because he had to replace some tablecloths that one time. But when something becomes a predictable cost of business (i.e., taxes), they are factored in as a cost of production and the resulting consumer price predicated by the owners’ necessary (or else get out of the business) profit margin.

When production costs go up, prices go up, which means fewer units get sold. Fewer businesses want to try surviving in those new margins so the number of competitors will decrease. Looks like layoffs and higher prices to me.

Re: who ultimately pays taxes?

ThatOldGuy — Sat, 25 Feb 2012 19:22:36 GMT

MDay1985:
However, consider this: doesn't the consumer factor in the taxes they pay into the wages they demand from their employer? Therefore, the taxes fall unto the producer.

In that respect, they fall onto the producer as a consumer (as a consumer of labor services). They are not only taxing the productivity of the laborer, as a consumer of income, but also the capitalist in his capacity as a consumer of labor services, which he purchases for a price we call "income", "salary", et cetera (of the laborer). In all respects, everyone is a producer because he's a consumer and vice versa.

Re: who ultimately pays taxes?

EmperorNero — Sat, 25 Feb 2012 19:01:02 GMT

Well, wages are not really determined by what workers "demand". Obviously they always want more. But how much they can demand is determined by supply and demand. Employers compete for labor, meaning they have to pay more to get scarce labor to work for them. Your employer doesn't care how much you pay in taxes, he only needs to pay you more than the next competitor. Taxes aren't transferred to the employer.

Although that's not really the reason that corporations can't pay taxes. Corporations are abstract aggregations and not consumers. They aren't really a thing that could be made richer or poorer through taxes. If corporations are taxed, that means purchasing power is transferred from the rest of us to the state. Because ultimately, where else would that purchasing power come other than from people?

who ultimately pays taxes?

MDay1985 — Sat, 25 Feb 2012 18:48:55 GMT

I hear many economists say that corporations do not pay taxes. Bastiat said "Taxes must, in the end, fall upon the consumer", meaning that corporation look at taxes as any other input cost, and build it into the price of the goods they sell. Therefore, the taxes fall unto the consumer.

Very well. I accepted that train of thought for years. However, consider this: doesn't the consumer factor in the taxes they pay into the wages they demand from their employer? Therefore, the taxes fall unto the producer.

Doesn't this just go on into an endless circle?

What am I missing or not understanding correctly?