RALEIGH – Cognizant of the fact that I’m about to make an argument that some politicians and political activists in North Carolina won’t want to follow to its logical conclusion, I’m going to start simple and progress slowly.
Here’s the first point. People are not abstractions. They are real, flesh-and-blood beings.
Second, business enterprises are abstractions. They are essentially bundles of contracts among real, flesh-and-blood beings. Some people buy stock in a company. Others lend it money at interest. Still others work for the company, either as employees or contractors, in exchange for compensation, either in money or non-wage benefits. And finally, if the company is at all viable, lots of other people buy goods and services from the company.
The company itself, however, is not a person. You can’t look at it, touch it, visit it, or tickle it.
Therefore, if politicians pass a law to make a company do something, what they are really doing is compelling the people associated with the company to do something – be it fill out a form, install a wheelchair ramp, buy health insurance for employees . . .
Or pay a tax.
With me so far? I’d tickle you just to make sure you’re still awake, but this is strictly an online transaction.
Now, if politicians enact a tax increase on “business,” the people associated with each company have to share that higher cost of doing business in some proportion. Owners and investors could receive lower returns. Employees and vendors could receive lower compensation. Or customers could pay higher prices.
At no company do all these groups actually get together at a single meeting and hammer out their shares of the new tax bill. Instead, the solution to the problem arises over time, through thousands or even millions of individual decisions and transactions. The result differs by company. But there is a general tendency.
It derives from a concept called elasticity. You can also think about it in terms of necessity or mobility. But perhaps the easiest way to think about it is as a game of “hot potato.”
Imagine that you are playing hot potato – or hot potatoe, if you happen to be from Indiana – with a group of friends. Further imagine that some friends are free to move around the room while others have balls of varying weights chained to their ankles. You have to take the potato if it’s offered to you. After you count to three it must be handed to someone else, not thrown or dropped.
Very quickly, it would become obvious that the slower-moving friends have a disadvantage in this game. The fleet of foot can hand off the potato and then move quickly away. Inevitably, the person with the heaviest weight will end up standing alone with the spud.
Now let’s get back to this business of a tax on business. If you think about the investors, employees, vendors, customers, and other interested parties as players of the hot potato game, which group is most likely to end up with it? The answer is the employees. They are the least mobile.
If the potential returns on equity or debt fall, investors can take their money elsewhere – and in modern financial markets, that somewhere is almost anywhere in the world. Depending on the kind of tax involved, customers also have other places to go. If it’s a state income tax, they can buy similar goods made in lower-taxed states. If it’s a sales tax, they can buy online or shop across the border in another state (that’s not quite as easy, which is why consumers usually bear a higher incidence of the sales-tax burden than of the income-tax burden).
The people with the most difficult exit strategy are those who work for the taxed company in some capacity. It’s a lot harder to pick up themselves, their families, and their property and move somewhere else to get a job with a lower-taxed company. So they end up bearing the greatest incidence of most “business” taxes in the form of lower wages and compensation.
This isn’t just a theoretical issue. In recent decades, the empirical research on tax incidence has been piling up, and most of it points to employees as the main payers of business taxes. The most recent study I’ve seen came from the Tax Foundation earlier this month. Economist Robert Carroll studied corporate tax and wage data across the 50 states. His model found:
… a statistically significant, negative relationship between corporate taxes and the real hourly average earnings for production workers. A 1 percent increase in the average state and local corporate tax rate can be expected to lower workers’ real wages by 0.014 percent. This implies that for every one-dollar increase in state and local corporate tax revenues, wages can be expected to fall by roughly 2.5 dollars.
So, raising taxes on a company tends to reduce the wages of its employees rather than drain the bank accounts of coupon-clipping fatcats.
If that’s your goal, fine. If it isn’t, you’d best try something else.
Hood is president of the John Locke Foundation