Among the most misunderstood concepts in public policy is the burden of taxes. One unfortunate result is a good bit of bitterness and calumny over who pays their fair share.
Taxes are collected through an administrative process. Property taxes are assessed against property owners, income and payroll taxes against income earners, inheritance taxes against heirs, and sales taxes against consumers.
However, it is the laws of economics, not government rules, that determine who bears the burden of taxation.
A corporation presumably pays taxes on its profit, so the naïve suppose that those greedy stockholders pay the taxes. But corporations can choose how much labor, machinery, land and raw materials to purchase. They pay market prices for all these items; so, to pay the corporate taxes, a company will change the number of workers or machines it buys. In this way, the burden of corporate taxes is shared among workers, investors, consumers and suppliers.
Payroll taxes offer another obvious example. When FDR pushed through Social Security, he did so in part by arguing that both the business and the worker would pay the tax. That is true administratively, but in fact workers bear the burden to a varying degree depending on how important they are to the business. Low-skilled workers, who earn little, will pay all the tax in the form of lost earnings. Higher-skilled workers, who command a higher wage and enjoy bargaining power, bear a lower share of the tax because they can force higher wage concessions on employers.
The relative share of tax paid by each group depends upon the relative responsiveness of each to a change in the prices they charge.
Determining who pays occupies a fair bit of scholarly research, but it would take a different tax rate on every transaction to make it uniform. Moreover, because we consume and earn differently across our lifetimes, the share of income and wealth we pay in taxes depends in part on our age and whether we are businesses or households.
I merely wish to point out that a government cannot simply change a tax law and dodge the laws of economics. Whom we tax has little to do with the burden of taxation. How we tax can adjust the burden of payment.
The best way to evaluate fairness in tax reform proposals is to spend time understanding who actually bears the burden. The answer might be surprising.
Any tax debate should be influenced by data and analysis. The tax burden is the least understood, and probably most important, part of the debate.•
Hicks is the George and Frances Ball distinguished professor of economics and director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at [email protected]