Who bears the burden of a corporate tax?

JOE BIDEN wants to rebuild America, and he reckons that American firms can help foot the bill. Central to the president’s grand infrastructure-investment push is a plan to raise the tax rate on corporate income from 21% to 28% (though he has hinted he may settle for less). Although the administration pitches its tax proposals as a way to redress the problem that “those at the top are not doing their part”, opponents warn that corporate-tax rises do not simply fall on wealthy shareholders, but also shrink the pay packets of the working people the president claims to champion. In fact, workers often do bear some of the burden of increases in corporate taxes—though understanding just how much is a question that continues to vex economists. Nonetheless, the details of Mr Biden’s tax plans suggest that they may prove more worker-friendly than the usual effort to squeeze juice from Apple.Other things being equal, a tax on corporate profits should hit shareholders—a group wealthier than the population as a whole—by shrinking the money available for dividend payments or reducing share values. But other things are never equal. Firms invariably respond to new taxes in order to minimise their costs. Depending on precisely how they seek to escape the tax, some of its burden may be passed on to others. A seminal paper published in 1962 by Arnold Harberger, an economist, reckoned that such wriggling by owners of capital was unlikely to shift the cost of a corporate tax onto other inputs to production. He imagined an economy with just two sectors, corporate and non-corporate, and then supposed that a tax was placed on the income of the former. Capital, he reasoned, should shift from the corporate sector to the non-corporate (consisting of partnerships and other sorts of business). As a consequence, the average rate of return on capital in non-corporate firms should fall, reflecting the flow of resources to lower-yielding sorts of production made attractive only because of the sector’s comparatively favourable tax status. Corporations could shift some of the burden of corporate tax to owners of capital in other parts of the economy, but not pass it on to workers.