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September 6, 2012
Tax History: Who Pays? It Depends on the Agenda
Joseph J. Thorndike

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In a 2010 column for The New York Times, Princeton economist Uwe E. Reinhardt raised a provocative and salient issue: "Does anyone actually know what set of human beings ultimately pay the corporate income tax?"1

The answer matters, not least because the corporate tax figures prominently in political debate. But after considering several answers, Reinhardt threw up his hands. "Even economists cannot agree on who actually bears the burden," he said.

What's striking about Reinhardt's confession is not its substance (common among tax experts), but its timeless quality. Scholars have been arguing for more than a century about who pays the corporate tax, but no firm answer has emerged. It's probably fair to say that economists have made some progress in trying to settle the question, but it's also fair to say that any progress has been limited.

Uncertainty, however, hasn't been a problem for the politicians eager to argue about corporate tax reform. After all, politicians traffic in uncertainties, both real and imagined. Over the years, confident assertions about incidence have peppered debates on corporate tax reform. And thanks to the unsettled state of economic knowledge, politicians have been able to mix and match their incidence arguments with the agenda they've been pursuing.

Postwar Arguments

The decade following World War II provides a case in point. It was an era of fiscal flux, with political leaders and policy experts struggling to convert the wartime tax regime to peacetime purposes. The corporate tax figured prominently in that effort, not least because corporations had been taxed so heavily during the war.2

In 1946 C. Ward Macy reported on the vibrant debate among economists regarding the corporate tax incidence.3 Traditionally, economists assumed that shareholders were paying the tax. But in the postwar decade, a growing number of skeptics, both liberal and conservative, suggested that labor and consumers were on the hook, too.

"Everyone bears some part of the business-tax load, for the incidence (final burden) of business levies is probably not confined to owners," liberal economist Harold M. Groves wrote in a 1946 article.4

Business groups and their allies liked those arguments. Broadly speaking, they were eager to paint the corporate tax as a shared burden, not a targeted levy on capital and its owners. Specifically, they argued that the tax was passed to consumers in the form of higher costs and to workers in the form of lower wages.

"The federal income tax on corporations tends (1) to raise the cost of goods and services, and in some cases to pyramid them, (2) to keep wages lower than they might otherwise be, and (3) to limit the yield on risk-bearing investment," argued Beardsley Ruml and Hans Christian Sonne, widely regarded as business-friendly liberals.5 That seemingly balanced assessment was actually controversial, at least when measured against prevailing opinion. Indeed, Ruml and Sonne used their incidence assertion to bolster their call for abolishing the corporate tax. Then, as now, efforts to scale back the corporate income tax relied on arguments that the tax burdened all Americans, not just shareholders.

Other business leaders were quick to agree, insisting in particular that the tax was inflationary. "Corporate taxes are simply costs," a U.S. Steel executive said in 1943. "The method of their assessment does not change this fact. Costs must be paid by the public in prices, and corporate taxes are thus in effect concealed sales taxes."6

Experts at the Committee for Economic Development signed on to that sweeping assessment of corporate tax incidence. "When the tax money is traced down, 'corporate taxation' turns out to be in part a tax upon the income of stockholders, and in part an indirect tax upon consumers, wage-earners, or both," they wrote. "The indirect taxation occurs because such taxes are accounted as part of the costs of doing business, and [sooner or later] some part of the tax gets passed on to consumers in the form of higher prices for the goods they buy; some part of it, also, is invisibly borne by workers in the form of lower wages and salaries than they could otherwise receive."7

Notably, the committee insisted that the broadly shared burden of corporate taxation was effectively hidden from most taxpayers. "The consumers and wage-earners are of course unaware that they participate in the payment of taxes levied in the first instance on the earnings of corporations," it wrote.

In fact, however, at least some consumers and wage earners knew that they might be sharing the corporate tax burden with stockholders. "Corporate taxes on profits are supposed to be borne by corporation owners," said a spokesman for the Congress of Industrial Organizations, an ancestor of today's AFL-CIO. "That supposition is almost certainly false. Corporations simply anticipate what their taxes will be and add them to the prices they charge -- pass them on to consumers."8

Generally speaking, the CIO was not inclined to parrot the pro-business rhetoric on tax topics. But labor leaders were using arguments about shared incidence to bolster their case for raising, not reducing, taxes on corporations. Because corporations weren't bearing the full burden of the corporate income tax, they could afford to pay still higher taxes, labor said.

It was a convenient argument, but not an easy one to sustain. Over the course of the postwar decade, labor organizations argued consistently and passionately for higher taxes on business. Implicit in their arguments, however, was the assumption that those taxes were paid by corporations, not consumers and workers.

Indeed, when the Eisenhower administration and its congressional allies set out to create new tax incentives for investment, labor groups and liberal politicians decried the effort as a giveaway to the rich. Rep. John W. McCormack, a Massachusetts Democrat, offered a typical objection. "The Republican tax bill is indefensible in that portion which gives great benefits to corporations and constitutes a bonanza to stockholders, the larger ones in particular," he said in 1954.9

Having It Both Ways

In other words, 1950s liberals adopted disparate views of corporate tax incidence depending on the policy context of their argument. Today we often see a similar dynamic at work. Last year, for instance, GOP presidential nominee Mitt Romney waded into the murky world of corporate tax incidence when he insisted to a heckler that corporations are people. In other words, any tax increase on corporations would ultimately be paid by a real, flesh-and-blood person.

For many Romney fans, that person was the candidate himself. In discussions of Romney's effective tax rate (13.9 percent in 2010, according to most calculations), defenders have insisted that Romney get credit for corporate taxes. "About two-thirds of Romney's income had already been taxed at the corporate level," wrote commentator Michael Tanner. "While a precise estimate is impossible because of variations in corporate-tax payments, if one assumes an average effective corporate rate of roughly 25 percent, Romney's real federal income-tax rate was closer to 30 percent."10

So according to the National Review, the corporate tax is paid by shareholders like Romney -- that is, except when it isn't. In 2011 Veronique de Rugy published an article in the National Review Online suggesting that labor might be footing much of the bill for the corporate tax.11 Drawing on a variety of recent studies (including a well-known assessment from the Congressional Budget Office that labor might bear as much as 70 percent of the long-term burden12), she warned against easy assumptions about the tax and its incidence.

Which raises the real issue: When it comes to incidence, uncertainty can be a virtue, at least for politicians and political magazines. It's possible to build a case for tax reform using one assessment of tax incidence and then, with equal certainty, invoke a different assessment to justify a different policy revision. In politics, you can have it both ways -- at least when the economists are too confused to referee the debate.


1 Uwe E. Reinhardt, "Taxes and Economic Growth," Economix blog, The New York Times, July 16, 2010.

2 For a survey and critical analysis of corporate tax reform in this period, see Steven A. Bank, From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present, Chapter 7 (2010).

3 C. Ward Macy, "Incidence or Effects of the Corporation Income Tax?" 36 Am. Econ. Rev. 903 (Dec. 1946).

4 Harold M. Groves, "Personal Versus Corporate Income Taxes," 36 Am. Econ. Rev. 241 (May 1946).

5 Beardsley Ruml and Hans Christian Sonne, Fiscal and Monetary Policy 11 (1944).

6 Quoted in Richard Goode, "The Corporate Income Tax and the Price Level," 35 Am. Econ. Rev. 40 (Mar. 1945).

7 Committee for Economic Development, "A Postwar Federal Tax Plan for High Employment" (1944), at 16.

8 Quoted in Goode, supra note 6, at 41.

9 Quoted in Floyd Norris, "Unearned, and Taxed Unequally," The New York Times, Jan. 19, 2012.

10 Michael Tanner, "Romney's Taxes and the Liberal Mindset," Nat'l Rev. Online, Sept. 5, 2012.

11 Veronique de Rugy, "How Punishing Is the Corporate Income Tax?" Nat'l Rev. Online, May 4, 2011.

12 See William C. Randolph, "International Burdens of the Corporate Income Tax" (2006-09), CBO (Aug. 2006), Doc 2006-15966 , 2006 TNT 163-23 .