Can Corporations Pay Taxes?

Today the Senate voted against a special new tax on oil companies. What was the purpose of this tax? I guess it would have raised many billions of dollars in the short term, but the real reason was to get even with the evil oil companies. Let’s take their money. That will show them! But take money from whom? Who pays taxes? Can corporations pay taxes?

I guess it all boils down to this: what is a tax? I would define a tax as a burden, a pain, a unavoidable force to make you work – a slavery of sorts. While it is true that you can put a burden on a corporation, will it feel the pain? Can you enslave a corporation? The answer is a simple NO. A corporation cannot feel pain. It is not human. Corporations are born, and can die, but they feel no pain.

So what is a corporate tax then? Who really pays that tax? There is no one answer to that question, there are many people who pay the tax:

The eventual payers are the owners of the corporation, which for almost all corporations, are the PUBLIC. So a big tax on oil companies is really a tax on the public. Most people don’t realize that they own interests in lots of companies. You might buy shares of the company, of course, but you might have a retirement account. Work for the State of California, you own stakes in almost every corporation on the face of the planet, even some that are private. Of course, some corporations are owned by a few small number of people, but most of those corporations are thought of a “good” corporations: like google, microsoft, yahoo, etc. The majority of corporations today are owned by large funds, especially retirement funds, and small shareholders. How many people own shares in Chevron? lots, perhaps as many who buy gas from their pumps.

The second payers, often the first to pay the real “pain” of corporate taxation, are its lowest level employees- the ones that are easiest to hire and more importantly, easiest to fire. If a company needs a bottom line to look better the answer is usually to fire people (payroll is normally the biggest liability a company has). Occasionally a corporation might fire the highest paid people, but usually those people make the decisions and deciding to fire yourself is a difficult thing to do. Along with low level employees, suppliers may be forced to carry better financial terms when profits drop. One can hope that oil companies might be able to convince their OPEC suppliers accept delayed payments, but I doubt it. On the other hand local suppliers are not so powerful and would feel the pinch.

Generally the effect of corporate taxation has only a small effect on the users of the product (or service) the corporation produces. Why is this? You always hear that a company will just pass on the price increase to the consumer, right? Well if a single corporation could just raise its prices without losing business then it would have done so a long time ago. In a free market, if one company raises its prices then people will buy from a different company.

That said, the windfall profits tax will increase prices at the pump, again hurting those least able to pay for gas. How could that be, I just said the free market would prevent this. Well, in this case the tax applies to ALL oil sold in the U.S. adding the effect of collusion to the “free market”. We normally think of collusion as bad because it allows companies to fix prices. Well the Government is the ultimate collusive force. Unless some other replacement of oil is offered as an alternative, oil companies would be able to raise their rates in unison. The consumer has no alternative. Oil companies would not be able to recover all of their profits however, because as prices go up, demand would go down, pushing prices back down. That is the law of supply and demand.

So, those that want oil companies to “pay” for the increase in gas prices using a “windfall profits tax” would really just be taxing the public and causing some unemployment for the lowest paid employees of the oil companies and jacking up prices for those least able to pay.

There is a better way to take revenge on oil companies – build hundreds of nuclear power plants, but that is another post.

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