Taxes

Passing Laws, Passing Taxes, and Passing the Buck

Understanding the real economic impact of higher taxes.

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What do the French digital services tax, the employers' share of payroll taxes, and the corporate income tax all have in common? They are rarely shouldered by those entities and individuals targeted by legislators. In fact, one of the most important things to know about taxes is that the people who actually write the checks to the Internal Revenue Service (or to its French equivalent) are seldom the ones who actually shoulder its burden.

In 2004, economist Stephen Entin wrote, "The economic burden of a tax frequently does not rest with the person or business who has the statutory liability for paying the tax to the government." That's because taxes are paid only by flesh-and-blood individuals. The actual incidence of any tax is not determined by the formalities of the tax code but, rather, by the realities of markets—specifically, by how sensitive buyers are to price changes, relative to sellers. It makes it difficult to fully predict the full impact of taxes, but as a general rule, it is rarely what politicians think.

Take, for example, the employer's statutorily stipulated share of the payroll tax. On paper, workers and employers each pay 7.65 percent of the employee's salary and wages. Employers send their portion of the tax as well as the one collected from their employees to the government. But this fact doesn't tell us anything about the tax's true burden. Economic research shows that employers shift the burden of the payroll to their employees by decreasing workers' wages by almost 7.65 percent.

So the next time you hear someone announce that they want to enact a federal paid leave policy to be paid for by increasing the payroll tax, ask yourself whether it makes sense for the government to give to workers with one hand and then to take from the same workers with the other hand. This is precisely what will happen. Employees end up paying their share of the payroll tax increase, in addition to paying—through lower wages—their employers' share.

Payroll taxes are extremely regressive, disproportionately impacting low-income earners, so any hike in such taxes will hit those workers especially hard. That includes, of course, the workers that government paid leave policies are supposed to help the most.

What about the corporate income tax? From Sen. Elizabeth Warren (D–Mass.) to author Marianne Williamson, Democratic presidential candidates have been telling workers that, if elected, they'll repeal President Donald Trump's 2017 tax reform. That includes repealing the corporate income tax rate reduction from 35 percent to 21 percent. If that happens, these candidates assert, corporations will foot more of the tax burden and, thus, lead to a more equitable world.

Don't fall for it.

First, corporations don't pay taxes. People do. In this case, economists have figured out that a big chunk of the additional tax burden will be shouldered by workers and shareholders (if you have a retirement plan, that means you).

What economists can't seem to agree on is the degree to which workers are burdened. Estimates range from 66 percent to 100 percent of the tax falling on workers in the form of lower wages. Democratic candidates should think about this large burden when calling for a restoration of the 35 percent corporate tax rate.

Finally, France's government has announced that it will impose a 3 percent digital tax on the revenue of American tech giants like Facebook, Google, and Amazon. The rationale is that it's supposedly necessary to make internet companies pay their "fair share" of taxes. But if that's the true objective of this blatant extraterritorial tax grab, it'll completely miss the mark. Big tech firms won't ultimately shoulder that tax—consumers will.

Consider Amazon. That tax will force the company to reduce its capital investments. Less investment means less production, lower productivity, fewer jobs, and higher prices for consumers. This prediction is consistent with a recent report by Deloitte, which finds that big tech companies will pay only 5 percent of the tax. The rest of the tax burden will be passed along to consumers who use the digital platforms.

The bottom line is that nobody can determine who truly bears the burden of a tax just by looking at where or on whom it is initially imposed, despite what the tax is called. Politicians better learn that lesson, unless they want to continue hurting the people they claim they want to help.

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  1. Sorry, I think it’s far preferable to force current voters to pay for government expenditures through whatever taxes are necessary than to permit them to rob from future generations and others who can’t even vote on taxation.

    1. Balanced budget amendment!

      1. A balanced budget vs. robbing future generations is not a binary choice. In our current fiat money economy, a third choice makes much more sense:

        STOP ISSUING DEBT-BASED MONEY! Begin issuing pure “unbacked” fiat money to fund the deficit, rather than going further into debt. The inflationary impact of unbacked dollars is no worse than the inflationary impact of the same amount of debt-backed dollars. And it doesn’t leave an unpayable debt burden on future generations. Issuing unbacked dollars will halt the increase in the national debt and its crushing interest payments, which currently amount to over $15 PER DAY for every family of four in the U.S. Paying off part of the maturing debt each year and rolling over the rest will eventually bring the national debt (and its taxpayer-financed interest payments) down to zero. See http://www.fixourmoney.com .

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    3. I have a lot of sympathy for this argument.

      Taxation is theft, but taxation of those who didn’t even get a chance to vote on it is an even worse form of theft.

      1. Meh. Not much worse really. It’s all the same in my eyes whether you have a chance to object to being robbed or not.

        1. It’s all the same in my eyes whether you have a chance to object to being robbed or not.

          We have excessive government spending because the majority of voters don’t have to pay for it. If the current budget needs to be paid out of current tax revenues every year (balanced budget), the incentive structure for voters changes radically.

          Ask yourself: would most middle class voters choose to pay 10-15% more in taxes in order to finance current government spending, or would they prefer to invest that money privately?

          One of the reasons European military spending is so much lower than US military spending is that European voters are not willing to pay thousands of dollars per year for their military, and they can’t pawn it off on future generations.

          1. “One of the reasons European military spending is so much lower than US military spending is that European voters are not willing to pay thousands of dollars per year for their military, and they can’t pawn it off on future generations.”

            The main reason is that Europeans have been free riding on the United States military ever since the end of World War 2. They don’t pay for their own defense because they don’t have to – we are paying it for them.

            1. “The main reason is that Europeans have been free riding on the United States military ever since the end of World War 2. They don’t pay for their own defense because they don’t have to – we are paying it for them.”

              Yes.
              Credited to Elvis when asked why he wasn’t married yet: “Why buy a cow when you can get milk through the fence?”
              It’s not some moral stand that keeps the Euros from paying for their own defense; it’s just they they have a sucker doing it for them.

              1. It’s bad for Trump to ask them to pay more of their fair share. According to people who complain about people who don’t pay their share.

      2. If we aren’t voting against it, why would they?

    4. I have to agree with JW. We are accumulating debt as a nation because we choose not to tax appropriately for the services the government provides. If we raised taxes and showed people what the services cost we could have an honest discussion about the need for those service.

      1. An honest discussion. Therein lies the problem.

        1. It is simple. Tax those guys for the services I want.

          1. I have a RIGHT to have the government force other people to pay for my basic needs!

            Haha

            1. Needs and wants!

        2. No, the problem isn’t honesty, it’s rational behavior.

          It’s rational for every individual to exercise their political power in a way that minimizes their taxation and maximizes their benefits.

          If a democracy is set up so that large deficits and government debt are possible, it is inevitable that people will vote for it and that all major parties support it.

        3. The only good tax is the one that taxes the other guy.

      2. We are accumulating debt as a nation

        No. The government is accumulating debt. “We” are not.

        1. How does the Constitution start? “We the people” The government is elected by the people and represents the peoples wishes. So we are accumulating the debt.

      3. Or we could reduce “services” to see if they are really needed.

        1. Yes we could reduce services. But that doesn’t happen. In part because we feel no pain. Tax at an appropriate level and then see how people feel about the services.

          1. None of the people on your side are proposing to increase taxes on the vast majority of the people receiving the services. It’s literally impossible to meaningfully increase taxes on the rich by enough to balance the budget, but if it were, a balanced budget at this point would have zero impact on people on the receiving side of income redistribution.

      4. “We choose not to tax appropriately for the services the government provides”.

        Or the waste, or the bloat.

      5. “what the services cost” — What service?!?!?! The only “service” I see is mass media publication and fame of retarded psychopaths and whole slew of harrasment. Perhaps I get a little homeland security; but good grief at 2x my living expenses just for “security”! I don’t live in the nastiest crime addicted country in the universe.

        No, sorry. The only “service” I see is all going towards those self-entitled “The world owes me” mentally challenged individuals who don’t pay taxes anyways.

    5. But that could result in taxpayers demanding an end to government bloat and waste! The horror!

      Haha

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  3. If there is anyone in this world I want to go away, it is Elizabeth Warren.

    1. And take Bernie Sanders with her. I can’t stand watching either one of them, they’re just so damn angry all the time. And what have they got to be mad about? They seem to be mad that the voters and the public are so damn stupid that they haven’t elected Bernie Sanders and Elizabeth Warren as their King and Queen because those two have all the answers to everything and the answers are not that hard, this is all stuff that a 4-year old should understand. How can you not understand that free shit and more government is an easy fix to all the problems in the world?

      1. Bernie can go too. But I never had to listen to a commencement speech by him.

        1. Holy shit, I am so sorry that I inadvertently triggered your PTSD, I really did not know that you are a survivor of that level of torture. Please accept my sincerest apologies, I didn’t know that you were forced to face the horror live and in person and I in no way meant to flippantly dismiss your trauma.

          1. At least I have legal weed to deal with it!

    2. Lizzie and Bernie really are true believer progressive ideologues, and in that sense they are scary and should be kept away from all the levers of power.

    3. Everybody has a purpose in life. For Elizabeth Warren, it may well be to be the losing opponent candidate against Trump. Trump can’t wish for a better opponent. Her voice alone loses her several percentage points.

      1. Isn’t it just grating? Like she’s about to cry or just barely holding in her shit. Maybe both.

  4. Employees don’t have payrolls so they don’t pay a tax on payrolls. They pay tax on their income. The “employees share of the payroll tax” is an income tax.

  5. With any economic policy you have to look at the incentives it creates, not the intentions (real or faked) of its creator.

  6. Progressives hold two fundamental if conflicting beliefs: that government should own everything, and government should provide everything. To them, taxes are just a handy mechanism.

    Speaking of taxes, from a non-progressive perspective, I see only two “fair” types of tax: head tax and user fees. Every deviation from these comes from a desire to manipulate people.

    1. “Speaking of taxes, from a non-progressive perspective, I see only two “fair” types of tax: head tax and user fees. Every deviation from these comes from a desire to manipulate people.”

      True. That is why we have a system where about half the population pays no federal income taxes yet still has an equal say in how all the money collected from the other half is spent.

  7. All we need to do to start the revolution is repeal income tax withholding.
    Present Joe or Josephine Dokes with an invoice for $XX,XXX.00 come April 16th and we’ll find a whole lot of allies.

    1. And a whole lot of debtors prisons (at least the first year).

    2. My fantasy also eliminates unemployment:
      Hire a bunch of new tax collectors.
      Everyone gets paid in cash at the first window. Then they have to go to the next window and pay federal income tax withholding in cash. Then the next window and pay social security in cash. Then Medicare in cash, then optional windows for state, city, transit districts and whatever other taxes the democrats have thought up. Last they pay in cash for the benefits they have elected.
      The voter turnout at the next election will set records.

      1. “”The voter turnout at the next election will set records.”‘

        Maybe, but they would burn this place down before that.

  8. France and Paris will continue its slid to Shithole status. The Climate laws are spiking inflation, especially food, and everything transported within the grid.

  9. De Rug missed the most important issue out there: Passing gas.
    She’s really slipping.

  10. I could use a link to “Economic research shows that employers shift the burden of the payroll to their employees by decreasing workers’ wages by almost 7.65 percent”.

  11. I have a question. If all taxes are ultimately absorbed by consumers and/or employees, then what was the reason that corporations kept profits off-shore, purportedly unwilling to bring the money to the US to avoid a 35% tax rate. If they don’t really pay it, why would they bother keeping the money out of the country?

    The only thing that comes to mind is that they simply can’t pass off that big a hit. It would make them noncompetitive either amongst their competitors in the product marketplace and/or acquiring and retaining employees.

    Perhaps there is no simple answer…

    1. How about they’d rather not stick their employees and stock-holders with the bill, and also be able to keep money for acquisitions and expansion?
      The real question is why *wouldn’t* they keep the money?

  12. Good article. If every “food” company gets taxed the same then the “food” that every person needs gets taxed the same rate. There is no loophole, choice, or decision to get anyone around a “food” tax. Its just a theft of “food” eating people by a group of mobsters in the profession of burglary.

  13. Does anyone, anywhere take this uptight, shrill, harpy seriously?

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