A recent article in The Wall Street Journal highlighted a debate between economists as to whether workers or investors bear the greater burden of U.S. corporate taxes.
This is very interesting and manages to politicize corporate taxation. If workers bear the greatest burden, a reduction in the corporate tax might attract Democratic votes. On the other hand, if it is decided that investors shoulder most of the burden of corporate taxes, one would expect conservatives to be more supportive of corporate tax relief.
Are these people serious? The customer pays substantially all of a corporations costs, whether these costs are wages, raw materials, occupancy costs or taxes. Whenever a corporations cost of doing business changes, the initial impact is on the margins, either up or down, depending on whether costs go up or down, if up, margins decline, or if costs go down, margins get a short term boost.
Over time, pricing will be adjusted to reflect market forces. If costs go up and price relief is not an option, a squeeze on other costs becomes the next alternative.
Businesses that are unable to operate at a profit eventually go out of business, hurting workers and investors.
Investors should note that, if the political class and their hired hands can’t even get the question right, a rational solution to tax policy may be difficult.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®