Who carries the heavier tax burden: corporations or people?

December 21, 2011

Ever wonder whether people or corporations carry a heavier tax burden? Well, it’s not even close: people pay more in taxes by a long shot.

First, let’s look at federal tax statistics. In 2008, corporations paid 12.0 percent of federal revenues; the figure for individuals was 45.3 percent. Similarly, total corporate income tax after credits came in at $200 billion in 2008, while total individual federal income tax over the same period was $1.145 billion.

Now let’s look at state tax stats. In 2008 corporations paid 4.27 percent of state and local revenues; over the same period individuals paid 27.9 percent of state revenues. Similarly, state corporate income taxes came in at $52 billion while state personal income taxes came in at $301 billion and state sales taxes came in at $ 278 billion.

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Please, this is preposterous. A well-established elementary result of tax theory, usually taught on day 1 of tax economics classes, is that ALL tax, including that levied on firms, is ultimately born by people – the firm’s owners, employees or customers. Furthermore, another well-established fact is that both economic models and real-world experience show that the optimal corporate income tax rate for a small open economy is ZERO, because it causes more distortions to the economy than other taxation means.

Why large countries keep a corporate income tax is because

1) otherwise, everyone wealthy enough would incorporate and evade tax and

2) basically being large, they can, even though they fudge it a lot for internationally active firms, with very wide differences between nominal and effective tax rates for political reasons.

Only the ignorant – of which there are many – call for higher corporate income tax rates out of principle.

See for instance this : http://ec.europa.eu/taxation_customs/res ources/documents/taxation/gen_info/econo mic_analysis/tax_papers/taxation_paper_1 5_en.pdf

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