Companies pass corporate taxes to workers, customers. What Idaho Legislature should do

Irish playwright George Bernard Shaw said, “If all economists were laid end to end, they would not reach a conclusion.” As with so many Irish proverbs, Shaw hits on a truth — economists aren’t known for consensus.

There are, however, a few areas of public policy where economists strongly agree. Polls conducted by The Initiative on Global Markets at the University of Chicago have found general consensus on price controls, international trade, and a few other policies.

Corporate tax policy is an example where economists have found that theory and historical experience line up. As the Idaho Legislature considers the governor’s proposed budget, reducing the state’s taxation of business corporations deserves consideration.

The primary argument for further reductions is that these taxes are not entirely paid by the corporations themselves or their shareholders. Corporations generally pass along whatever taxes they may incur in the form of higher prices to consumers and lower employee wages.

Such tax-induced actions affect what is known as tax incidence, or how the burden of the tax is shared. You and I bear the burden of many taxes we actually don’t submit to the government.

Corporate income tax is a business expense like any other that must be offset against revenues if the business is to make a profit. The tax is therefore passed on to consumers in the form of higher prices. Idaho’s corporate income tax is like a hidden sales tax to the consumer.

Moreover, empirical studies have shown that workers bear most of the burden of the corporate tax. A 2013 study across many industries found that a $1 increase in corporate taxes lowers wages by about 60 cents. This burden results because corporations hire fewer workers and pay them less than they would in absence of the tax.

At 6.5%, Idaho’s corporate income tax rate still ranks among the highest in the nation. Neighboring states Nevada and Wyoming have no corporate income tax.

A drop in the corporate tax rate is more likely to increase investment and hiring than the myriad tax incentives currently in place. Policymakers may find agreement if a lower overall corporate tax rate is accompanied by an elimination of exemptions, thus simplifying the tax code and the costs of complying.

We may not agree on much, but lawmakers would do well to consider the conclusions economists have reached.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa, Idaho. prcrabb@nnu.edu

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