Who Pays the Corporate Income Tax?

Corporations pay income taxes in an administrative sense: they write checks (or send electrons) to the IRS. But corporations can’t actually bear the burden – they are just legal entities, not living and breathing human beings.

So who ultimately bears the burden of corporate income taxes? Shareholders? Employees? Customers?

Economists have struggled with this question for decades. When Mick Jagger dropped out of the London School of Economics in the 1960s, for example, he allegedly complained that “economists can’t even tell if corporations pay taxes or pass them on.”

We’ve made some progress since then. Over at the Tax Policy Center, my colleague Jim Nunns summarizes what economists have learned over the past five decades and describes TPC’s new approach to distributing the corporate income tax.

As Jim reports, our best estimate is that workers bear 20 percent of the corporate income tax,  shareholders bear 20 60 percent, and investors as a whole bear 60 20 percent.

Workers bear some of the corporate income tax because capital can move around the world. All else equal, the corporate income tax encourages some capital to locate abroad rather than in the United States. That reduces worker productivity (since they have less capital with which to work) and thus reduces worker wages and benefits. As a result, some of the corporate tax burden falls on workers.

Investors in general bear the majority a portion of the corporate income tax for a similar reason. When you tax corporations, you encourage capital to flow out of corporate equities and into other investments, including corporate debt and non-corporate businesses. That flow reduces the rates of return that investors earn in those other asset classes as well. Much of the corporate income tax thus gets passed on to investors in general, not just corporate shareholders.

Shareholders alone, finally, bear the portion of the corporate income tax that falls on “super-normal returns” — i.e., the returns they get in excess of a normal rate of return.

If any readers know Mick Jagger, please send him a link to the study. Maybe it will finally give him some satisfaction.

P.S. For another overview, see this TaxVox post by Howard Gleckman.

Update 9/16: I accidentally reversed the all capital vs. shareholder shares in the original version of this post. Apologies.