Monday, March 01, 2004

They Really Must Think We Are Dumb

How else can one explain this bit of political rhetoric by a candidate for U.S. Senator from Illinois- "corporations pay 14% of their income in taxes; the average family pays 25%", then he says something about that being unfair and how he will change it.

But let us not get carried away. Who are these nameless, faceless corporations? More importantly, where do their earnings go, if not to taxes? A corporation is made up of individuals, from minimum wage folks up to the top paid CEO, all of whom are paid with the corporation's revenue. And profits are distributed to share holders through dividends.

So, if we raise the effective tax rate for corporations to equal that of the average family, what might occur? Well, that depends on the elasticity of demand of the products that a particular company makes. Absent near elastic demand, the consumer of the good or service will bear a portion of the increased tax. The other victim of the tax increase would be the corporation's shareholders, who are most likely large institutional investors, such as retirement plans and mutual funds. Or, the corporation could squeeze dollars out of its process, by increasing efficiency or technology or dampening wage increases. No matter how one looks at the result, it is not the corporation who actually absorbs the cost of a higher tax rate.

After all, what is a corporation? It is not a thing anymore than it is a group of people. You cannot hurt "it" without harming its component parts, which are people, or without passing along the effects to consumers. But what you can do, apparently, is use political rhetoric to villify the engines of economic prosperity when you are a Democrat running for the U.S. Senate.


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