Walter Williams writes a column http://tinyurl.com/27yznyt on tax
incidence and explains that politicians exploit the ignorance of the voters
with respect to tax incidence. In the column, Williams commits the same offense
that he decries.
Williams correctly explains that a tax is not necessarily borne by the entity on which it is levied. A tax on gasoline retailers is borne partially by consumers and partially by producers (i.e. employees or owners of the business). Either way, explains Williams, the tax is eventually borne by people, not corporations. Williams explains this to emphasize the point that President Obama's expressed intent to tax businesses will not be paid by said businesses but will be paid eventually by people, some rich and some not-so-rich.
Williams is correct in that a tax on business income ultimately is paid from the pockets of people. But he conveniently leaves out the rest of the story. What would be the result of not assessing a tax on business income? The result would be a subsidy. But that's good. Right? Shouldn't we be subsidizing business?
When the costs are not properly matched with an activity, it results in a subsidy to said activity thereby producing more of said activity than is best for society. It results in an inefficient allocation of resources. For example, there was a show on TV where a kid started a burrito business. He used his mom's credit to purchase the ingredients, prepared the burritos in his mom's kitchen and then sold them to his classmates. Without having to pay for the ingredients, the kid was making a good profit. The business was subsidized. The problem came when his mom noticed the charges. When the costs of the ingredients were considered, the boy's business was actually not profitable. In fact, the family lost money.
But taxes don't reflect a cost of a business. A tax is just the government taking what rightfully belongs to the business, people argue. Not so fast.
The purpose of tax is to provide funds for public goods. An example of a public good is a road. People drive on the road. Similar public goods are police, national defense and courts. It's possible to put up a toll booth at every intersection to pay for the upkeep of each road, but it's not practical. It's more efficient to get the money to pay for roads from taxes. Similarly, it's more efficient to pay for national defense through taxes. It's just not possible to calculate how much each person benefits from national defense and send them a bill.
Corporations use these public goods when conducting business. Corporations benefit from roads. Trucks transport goods on public roads. Workers commute on said public roads. Businesses benefit from public education by having an educated workforce. Thanks to Social Security and Medicare workers don't demand as much pay or retirement benefits thereby resulting in the government picking up the tab for a portion of worker compensation. Safe shipping lanes exist courtesy of our armed forces. Courts enforce contracts. Police provide safe neighborhoods thereby facilitating business.
The free market matches expenses with actions. If you want an ice cream cone, then you pay for an ice cream cone. A decision is made. I want that ice cream cone more than I want that money. With government provided goods, that decision is not made. The road is there. It's free. I can drive on it, and my action of using that road does not result in any additional cost to me.
In an ideal situation, the costs of something would be paid for by those benefiting. Because corporations and other businesses benefit from public goods, a tax is levied on their income. Theoretically the higher the income the more the entity benefits from the public goods. Thus, the higher their income, then the higher tax they pay.
But what's so bad about subsidizing business? It's still good to subsidize business, isn't it? A business that is not profitable, that is propped up by taxpayers is a drain on society. Subsidies for steel manufacturers sucked blood out of consumers and taxpayers for decades. The unprofitable steel companies avoided making necessary changes to make their businesses more efficient. Those that couldn't survive went bankrupt anyway leaving creditors holding millions in unpaid debt, leaving employees without jobs and retirees without their pensions.
Look at the auto companies. Bailout after subsidy after preferential tax treatment permitted the auto companies to overpay workers and fold to pressure from unions and make promises of post-retirement benefits that they had no way of paying. They've been struggling for decades, and subsidies have permitted them to continue their inefficient ways of doing business.
Another example is the homebuilding industry. The mortgage interest deduction provided a tax incentive, and there have been and still are plenty of other artificial government subsidies to the homebuilding industry. It created a bubble, artificially inflated home prices and profits for homebuilders, and allocated resources towards building houses that could have been allocated to more efficient uses (like building apartments).
Walter Williams wants his readers to believe that it doesn't matter who pays the tax. Individuals ultimately pay the tax anyway. But the absence of a tax directly on corporate income exaggerates corporate income thereby permitting unprofitable businesses to continue to suck blood out of society thereby resulting in an inefficient allocation of resources.
Williams correctly explains that a tax is not necessarily borne by the entity on which it is levied. A tax on gasoline retailers is borne partially by consumers and partially by producers (i.e. employees or owners of the business). Either way, explains Williams, the tax is eventually borne by people, not corporations. Williams explains this to emphasize the point that President Obama's expressed intent to tax businesses will not be paid by said businesses but will be paid eventually by people, some rich and some not-so-rich.
Williams is correct in that a tax on business income ultimately is paid from the pockets of people. But he conveniently leaves out the rest of the story. What would be the result of not assessing a tax on business income? The result would be a subsidy. But that's good. Right? Shouldn't we be subsidizing business?
When the costs are not properly matched with an activity, it results in a subsidy to said activity thereby producing more of said activity than is best for society. It results in an inefficient allocation of resources. For example, there was a show on TV where a kid started a burrito business. He used his mom's credit to purchase the ingredients, prepared the burritos in his mom's kitchen and then sold them to his classmates. Without having to pay for the ingredients, the kid was making a good profit. The business was subsidized. The problem came when his mom noticed the charges. When the costs of the ingredients were considered, the boy's business was actually not profitable. In fact, the family lost money.
But taxes don't reflect a cost of a business. A tax is just the government taking what rightfully belongs to the business, people argue. Not so fast.
The purpose of tax is to provide funds for public goods. An example of a public good is a road. People drive on the road. Similar public goods are police, national defense and courts. It's possible to put up a toll booth at every intersection to pay for the upkeep of each road, but it's not practical. It's more efficient to get the money to pay for roads from taxes. Similarly, it's more efficient to pay for national defense through taxes. It's just not possible to calculate how much each person benefits from national defense and send them a bill.
Corporations use these public goods when conducting business. Corporations benefit from roads. Trucks transport goods on public roads. Workers commute on said public roads. Businesses benefit from public education by having an educated workforce. Thanks to Social Security and Medicare workers don't demand as much pay or retirement benefits thereby resulting in the government picking up the tab for a portion of worker compensation. Safe shipping lanes exist courtesy of our armed forces. Courts enforce contracts. Police provide safe neighborhoods thereby facilitating business.
The free market matches expenses with actions. If you want an ice cream cone, then you pay for an ice cream cone. A decision is made. I want that ice cream cone more than I want that money. With government provided goods, that decision is not made. The road is there. It's free. I can drive on it, and my action of using that road does not result in any additional cost to me.
In an ideal situation, the costs of something would be paid for by those benefiting. Because corporations and other businesses benefit from public goods, a tax is levied on their income. Theoretically the higher the income the more the entity benefits from the public goods. Thus, the higher their income, then the higher tax they pay.
But what's so bad about subsidizing business? It's still good to subsidize business, isn't it? A business that is not profitable, that is propped up by taxpayers is a drain on society. Subsidies for steel manufacturers sucked blood out of consumers and taxpayers for decades. The unprofitable steel companies avoided making necessary changes to make their businesses more efficient. Those that couldn't survive went bankrupt anyway leaving creditors holding millions in unpaid debt, leaving employees without jobs and retirees without their pensions.
Look at the auto companies. Bailout after subsidy after preferential tax treatment permitted the auto companies to overpay workers and fold to pressure from unions and make promises of post-retirement benefits that they had no way of paying. They've been struggling for decades, and subsidies have permitted them to continue their inefficient ways of doing business.
Another example is the homebuilding industry. The mortgage interest deduction provided a tax incentive, and there have been and still are plenty of other artificial government subsidies to the homebuilding industry. It created a bubble, artificially inflated home prices and profits for homebuilders, and allocated resources towards building houses that could have been allocated to more efficient uses (like building apartments).
Walter Williams wants his readers to believe that it doesn't matter who pays the tax. Individuals ultimately pay the tax anyway. But the absence of a tax directly on corporate income exaggerates corporate income thereby permitting unprofitable businesses to continue to suck blood out of society thereby resulting in an inefficient allocation of resources.
