Determining the incidence of a tax – the people who are ultimately out of pocket as a result of its imposition – is a complex process. But we should be concerned about the overall distribution of the tax burden – which people pay what. And this is best examined by looking at the tax system as a whole rather than its individual component
George Bernard Shaw, subject to punitive income tax in postwar Britain, declared his occupation as “tax collector on 2½ per cent commission”. Some companies must know how he felt. In a modern economy, most taxes are collected and paid by businesses. Expenditure on tobacco and on petrol, and the apparent revenue of companies that sell them, is mostly tax. The principal taxes in almost all developed societies are income tax, payroll tax and value added tax or sales tax, and all three are mostly collected by businesses.
The government collects tax more cheaply from a few large companies than from millions of personal taxpayers. Governments could not collect 40 per cent of national income in any other way. The few taxes for which individuals have to write out cheques – mostly property taxes – arouse hostility disproportionate to the revenue they raise.
But a tax collected by business is not a tax on business. All taxes are paid by people, in their roles as employees, consumers, shareholders or homeowners. When people talk of a tax on a particular company, what they mean is a tax on the people associated with the company – perhaps its customers, shareholders or employees – just as when they talk of a tax on tobacco they mean a tax on the people who sell or use it rather than a tax on the tobacco leaf itself.
For some taxes, it is difficult to identify who the taxpayers are. Is a tax on payroll paid by the shareholders of the company, its customers or by the employees themselves? The answer is hard to assess and probably differs between the short and long run: shareholders may bear the burden initially, but in due course wages may be lower or prices higher. And if the tax discourages employment, it imposes an excess burden: the people who have lost their jobs are worse off, but the government has gained no revenue from them. The costs of the tax exceed the amount of the tax.
Some taxes paid by business fall on shareholders. Most shareholders are themselves institutions – pension funds, investment companies, other businesses – so we need to search further to find the people who pay. Determining the incidence of a tax – the people who are ultimately out of pocket as a result of its imposition – is a complex process. And often inconclusive, because it is always difficult to distinguish the effects of tax changes from other developments in the economic environment. The incidence of some taxes, such as the payroll tax and the corporate income tax, remains uncertain.
This opacity is often attractive to governments. If people do not know they are paying a tax, they are less likely to complain. British governments thought that reducing and then removing the advance corporation tax credit to pension funds was a clever wheeze: only a few people even understood what was proposed. People did not complain about the tax, but they complained loudly enough about the damage to their pensions. The episode reinforces the inescapable truth that all taxes are ultimately paid by people.
So what do commentators mean when they say that business must shoulder its fair share of the tax burden, or that taxes on business have increased? These statements are nonsensical, taken literally. Perhaps those who make them are talking about the balance between opaque taxes – such as payroll tax or corporate income tax – and more transparent taxes, for example income tax or VAT. Perhaps they are talking about the balance between taxes on shareholders and taxes on employees. Perhaps they have just not thought clearly about what they want to say.
We should be concerned about the overall distribution of the tax burden and this is best examined by looking at the tax system as a whole rather than its individual components. We should be concerned about the economic effects of taxation – how much do taxes discourage employment, enterprise or investment? And we should be concerned to ensure that the mechanisms of collection are cheap and efficient. Rhetorical talk of burdens on business simply gets in the way of sensible analysis of the key issues in tax policy.