Taxing Corporate Income: Who Really Pays the Price?

In this episode of Fascinating!, Rik from Planet Vulcan dissects the belief that taxing corporate income is a fair and just way to hold corporations accountable. With wit and sharp analysis, Rik unpacks the misconception that corporations are somehow separate entities that can be taxed without consequence. Instead, he explains that corporations are merely legal constructs—a “nexus of contracts”—and that in reality, it’s actual people who ultimately bear the burden of these taxes.

Rik delves into the complexities of tax incidence, exposing how the costs of corporate taxes are passed on to consumers, employees, and suppliers, leaving no one unscathed. He also challenges the broader issue of income taxation itself, suggesting that a shift toward consumption taxes, or even a carbon tax, might better align with fairness and economic efficiency. If you’ve ever wondered who’s really paying when governments tax corporate income, this episode will leave you with a whole new perspective.

Transcript

Taxing Corporate Income

 Good day to you, and welcome to Fascinating!  I am your host Rik, from Planet Vulcan.  My continuing mission on Planet Earth:  to search for signs of intelligence and to encourage its spread.

We have long noticed the persistence of a simple, easy-to-understand wrong narrative that many Earthlings appear to subscribe to.  The narrative is that taxing corporate income is at least appropriate, fair and just; and many believe that taxing corporate income is tantamount to striking a blow for social justice because corporations, along with Wall Street billionaires, are exploiters of the working class, so taxing corporate income is just stealing from stealers.

And this has long been a useful narrative for unscrupulous politicians who appear to be stupid to anyone with a functioning brain, because they say stupid things, but it’s probably closer to the truth to say that they just think their Earthling constituents are stupid. 

If you are of the second frame of mind, i.e., if you think you are just stealing from stealers, it means that you have probably been swept up in the quasi-religious movement known as Marxism.  If this is you, you believe in the dogma called the labor theory of value, which holds that all value is created by the workers, but that much of this value is taken from the workers by the owners of capital.  So from this jump-off point it is natural to conclude that the corporate income tax just takes a bite, and too small a bite at that, of the value share that is unjustly streaming to these owners of capital. 

We Vulcans hope that someday you will escape this cult you are in and realize that the labor theory of value was superseded a century-and-a-half ago.  

The subjective theory of value has replaced the labor theory of value as surely as the heliocentric model of the solar system has replaced the geocentric model. 

Without the labor theory of value, Marxism collapses.  Do I have to spell it out further?  What does it take to get you to admit you are betting on the wrong horse? 

But of course there are also many Earthlings who are not disciples of Marx, and who still find reason to believe that the corporate income tax is appropriate, fair and just. 

I asked my chatbot, “Why do people think it is a good thing to tax corporate income?” 

The chatbot gave a lengthy reply, providing an array of embarrassingly unsophisticated answers, and summarized it thusly: 

People believe it is a good thing to tax corporate income because it ensures corporations contribute to the public goods and services they benefit from, promotes fairness and equity, reduces the burden on individual taxpayers [seriously?], and helps counteract negative externalities. Corporate taxes also support a balanced economy, curb excessive wealth concentration, and hold corporations accountable for their social responsibilities.

As you can see, these arguments uniformly anthropomorphize the corporation, and speak of public goods and services as things that are magically provided by government, and not in fact paid for by the very taxpayers who are now said to be reaping where they have not sown.  Other misconceptions, ecnarongis and vague pious declarations abound. 

So I would like to offer to Earthlings an accessible discussion about why it makes no sense whatever to tax corporate income; and we can furthermore make a convincing argument that income should not be taxed at all.  More about that later. 

It is especially silly to tax the income of corporations because corporations do not actually exist, and something that does not exist cannot pay taxes.  You can levy a tax on corporate income, but it is always actual people who ultimately pay the tax. 

What then is a corporation if it has no concrete existence? 

A corporation is a fictional legal entity which operates as a nexus of contracts.  The corporation has contractual arrangements with suppliers, customers, employees, and sources of funding such as banks, with everyone, that is, except the shareholders.  

The shareholders are in a unique position, because their claim is residual, i.e., whatever is left over after all other contractual obligations have been met, goes to the shareholders.  If there is a lot left over, it belongs to them; if there is nothing left over, they get nothing; if there is less than nothing, i.e., if not all contractual obligations have been met – and here is one of the major virtues of the corporate form of enterprise – the shareholders are generally not personally liable for the corporation’s obligations.  

Instead, the unsatisfied creditors have the option of suing for payment, which might force the corporation into bankruptcy proceedings, where a court of law would decide what happens next, based on whether the corporation is deemed to be worth more dead (liquidation) or worth more alive (reorganization). 

If the bankruptcy court decides the business is best liquidated, then the shareholders lose their investment in the business, but no more than that.  This feature partly explains why the corporation has become the dominant form of business organization; it makes it easier for corporations to sell shares to investors than if the shareholders’ risk exposure had no limit. 

This is background knowledge you need if you wish to understand why taxing corporate income makes sense only from the viewpoint of the Little Willie Sutton theory of taxation, and not from the viewpoint of anyone else. 

If that is an obscure reference to you, Little Willie Sutton was a bank robber, who replied to the question “Why do you rob banks?” with “Because that’s where the money is”. 

Hold on, you say!  Isn’t it true that the corporate income tax reduces the amount of income that would otherwise be available for distribution to shareholders?  Well, yes and no.  There is more complexity here than what first meets the eye. 

Depending on a number of factors, the burden of taxation could ultimately fall on any one of the parties that have a contractual arrangement with the corporation.  Customers could end up paying higher prices; suppliers might see their profit margins squeezed; employees’ wages could be depressed.

There is a specialty in the field of economics called “Incidence of Taxation” which deals with the question of who actually has paid the taxes after all the dust has settled.  The experts who work in this field will tell you that it is devilishly difficult to tease out the answers to the questions of who pays the tax.  

This fact might help to explain why the taxation of corporate income is an easy thing to promote on the campaign trail; everyone can be made to believe that it is someone else, and not them, who is paying the tax.  The joke is on them.

And for those in the cult of Marxism, taxing corporate income is especially satisfying, because in their fantasy world it is class enemies who are paying the tax. 

The consensus of opinion among economists who study incidence of taxation is that pretty much everyone connected to the corporation pays part of the corporate income tax.  What is certain is that corporations do not pay tax because corporations have no concrete existence. 

Of course, taxation of corporate income would not even be an issue were it not for the ill-advised taxation of income in general.  The framers of the American constitution understood the dangers of direct taxation, and effectively forbade it as it applied to the taxation of income.  

Sources of taxes to fund the federal government in America were originally confined mostly to tariffs and excise taxes, and the government also received substantial revenues from the sale of public lands to private individuals. 

The 16th amendment, passed in 1913, specifically allowed for taxation of income.  Many people felt that the traditional sources of income were not providing a large enough take for what they wanted government to do.

The income tax was sold to a supportive public by the BIG LIE that only the very wealthiest people would EVER pay a tax on their income.  The BIG LIE worked, and the states ratified the amendment.   

This particular BIG LIE is still working today – evidently voters have short memories - and is trotted out whenever a new tax is proposed.

Let’s assume for purposes of discussion that taxation is a legitimate way to fund government operations.   

Even so, taxing income is problematic for several reasons, one reason being that when you tax something like production (which is the same thing as income) you get less of it.  It would be much better to tax consumption than income for that reason alone.  People would not be disincentivized to produce by a consumption tax, as they are with an income tax.   

A consumption tax ought also to be perceived as fair, because people with high incomes would have to pay a tax on everything they actually consumed.  And how can you justify envy if that’s the case? 

And look at all the expense and effort that goes into the reporting of income to the revenue service, and the expense and effort that goes into disputes between taxpayers and tax collectors.  American Earthlings spend many billions of hours and hundreds of billions of dollars per year dealing with the income tax.

But the biggest problem with the income tax is its intrusiveness.  Earthlings are more or less accustomed to such intrusions, but life would be better without them.

Imposing an excise tax on carbon usage is an idea whose time might have come, because that would not only serve as a substantial source of revenue, it would also incentivize an effective and efficient reduction in atmospheric pollution without having to impose the unworkable, futile and economically destructive mandates that are now being proposed as a way of dealing with the challenge of climate change. 

A carbon tax would make an ideal “instead tax” for the income tax, but it would be a tough sell as an “additional” tax. 

Ideas worth spreading. 

I invite you to listen to the next essay in the Fascinating! podcast series, and to have a look at the Fascinating! YouTube Channel. 

Please recommend Fascinating! to your friends if you find the lessons from nature in these essays personally valuable. 

Theme music:  Helium, with thanks to TrackTribe

Live long and prosper. 

Savor your experiences. 

Treasure your memories. 

Anticipate a happy and rewarding future. 

And respect nature’s wisdom.