For all of you discussing corporate taxes I have a question:  Each quarter you get a real estate tax bill.  Does your house pay it?  No?  Gee, why not?  After all, the bill is going to your house.  Just like a tax bill goes to a corporation.  Your house does not pay real estate taxes for the same reason a corporation cannot pay corporate taxes; they are both inanimate objects.  Inanimate objects cannot pay taxes.  That includes car taxes, gas taxes, you name it on a whatever tax.  Only human beings can pay taxes. 

When a company receives a tax bill the question to ask is who does pay it.  It turns out that is a difficult question to answer.  It depends on a whole host of things.  Here is an incomplete list:  Is consumer demand insensitive to the product's price?  Yes, then consumers pay a big chunk of it.  Do employees in the industry have good alternative wage options in lower taxed sectors?  No, then they see their wages cut to pay for it.  To what degree are profits reduced, leading to lower investor values?  A lot?  Then raising the corporate tax will cause investors to pay quite a bit of it.  To what degree is investment shifted from high value but high tax sectors to lower tax and lower value sectors?  This is a cost to all of us.  If you can answer all these questions you can figure out who pays which corporate taxes.  All I can say is good luck!  The fact is, we really do not know for sure who pays them.  All we do know is that people pay it.  GE did not make billions of dollars and not pay taxes.  Its employees, customers, investors and our economy in general made billions and did not pay corporate taxes on it.  That being said we did actually pay some corporate taxes on GE.  Presumably GE undertook uneconomic actions to maneuver their reported tax bill down to zero. But those maneuvers were necessarily inefficient meaning we are now collectively poorer.  So, all of the people that have anything to do with GE still paid an implicit tax through its economically inefficient tax avoidance investments and actions.

I personally dislike the corporate tax exactly because we do not know who pays it.  In general I prefer transparent policies.  If we want to tax wages in certain industries then tax the people working there directly.  At least that way we all know for sure what is being done.  If you think investors should pay higher taxes, fine.  Then drop the corporate tax and raise the dividend and capital gains taxes to those that get them.  This way if a poor person owns stock we can adjust things so that the corporate tax falls less heavily on him than if a wealthy person does.  There is, however, an argument for corporate taxes.  That is given all the other distortions in the tax code it may be better than the politically feasible direct taxes.  Could be, but I am skeptical.

That is it for my economics and taxes sermon for today.

It does not matter that a corporation is legally a "person."  The government could declare your house to be legally a person and it still will not pay your property taxes for you.  You own the house so ultimately you write the check.  Same for a company.  People own it so they (even indirectly) write the check.

As to the who pays it is not just the investors.  In fact to some degree they are likely to pay very little of it.  My guess is that most of it falls in lost investment (meaning the loss is shared among all of us), lower wages, and higher prices.  Yes, it is just a guess.  But here is why I suspect that.

Take three uses of investment funds:  Project A, Project B and Buy C.  In other words C is consumption.  Suppose our investor is willing to forgo consumption of C if he can earn a return of 8% or more on his investment.  Suppose without a tax code Project A returns 10% and Project B 9%.  Now tax half the return to A, leaving a 5% return to the investor.  What does he do?  Switch to low tax investment B.  The government in this example collects nothing.  The investor "pays" 1% in lost earnings.  Now tax B too leaving its return at 4.5%.  Then the investor simply consumes C and still pays zero in taxes.  But now as an economy we have lost both investment A and B and the investor is out a mere 2%.  That is absolutely the most the policy can cost him.  Yes, this is a very simple example.  The real world is more complex.  But it illustrates the point.  Money can easily move around.  Furthermore, investors do not have to invest.  They can consume things.  That takes resources out of the economy (investment puts them in) and forces the rest of us to compete for the remaining goods and services of which there are now less to go around.

If I were to add employees, consumers and suppliers to my little example you would see they all share in the cost of the corporate tax. Here is a quick example with an employee.  Assume now there is just investment A and consumption C.  If the investor starts firm A in our above example he can offer an unemployed worker say $40/hour and earn 10%.  Now the government taxes the firm at 50%.  Instead of  consuming C the investor can now offer to pay the employee, say, $30/hour and still earn the 8% he demands to forgo consumption.  Our employee decides $30/hour is better than unemployment and takes the job.  The investor is out a 2% return (that is his share of the tax) and our employee is out $10/hour.  That is the employee's share of the tax.  If I were to do this right I would have to allow for supply and demand for labor, investment and consumption across the whole economy. in principle you cannot just look at this in what is known as a "partial equilibrium" context.  But as you might imagine the mathematics would become a lot tougher!  The general conclusions, though, would remain intact. 

If you want to see a full blown example there are any number of undergraduate textbooks on public finance that have them!  I would list one here from my colleagues in the economics department but they seem to have neglected to post their syllabi so I am not sure what they are assigning these days.  However, I found a syllabus on line from U. of W. at Madison that has the following on its "good public finance textbook" list.  I have not looked at any of them and I do not know the instructor, so I cannot personally vouch for how good or bad the books are.  But some have to have full blown examples showing on who corporate taxes ultimately land.

The comments are from the copied syllabus.

Gruber, Jonathan. Public Finance and Public Policy,1st edition, Worth Publishers, 2005 (unusually
good undergraduate text)
Hindriks, Jean and Gareth D. Myles, Intermediate Public Economics, MIT Press, 2006
Kaplow, Louis, The Theory of Taxation and Public Economics, Princeton University Press, 2008
Laffont, J.J., Fundamentals of Public Economics, Cambridge, MA: MIT Press, 1988
Myles, G. Public Economics, Cambridge: Cambridge University Press, 1995
Salanie, B., The Economics of Taxation, Cambridge, MIT Press, 2003

If I drop a $20 bill off at your house does the house now have $20 or do you?  You do.  If I drop at $20 bill off at a flower shop does the flower shop have $20 or its owner?  It owner does.  Corporations are just flower shops, or houses or whatever with a lot of owners.  They do not collect money for their personal consumption.  They are just legal vehicles by which funds can come in and then get distributed to their owners, workers, suppliers, and others.  When you take revenue from a corporation to pay a tax you are really taking it from the person the corporation would have handed it to.