Who really pays corporate taxes? This is the question posed by Labour’s plan to raise £30bn (pdf) from extra taxes on companies.
These plans run into the problem that several studies have found that, ultimately, it is workers who pay a hefty chunk of such taxes. Michael Devereaux and colleagues have found that, in European countries, workers pay 92% of extra corporate taxes. A study of Germany alone has found that they pay around half (pdf) of them. And a US study (pdf) has found that they pay around one-third. A literature survey (pdf) by Ben Southwood finds that, on average, workers pay more than half of extra corporate taxes. But, he says, “each study gives such a wide range of results over such varying sets of circumstances.”
To see why the results vary, just remember how it is that corporate taxes are shifted onto workers. It’s because, as Sam Bowman says:
Lower returns to investment means less incentive to invest in the first place. Lower investment – less money spent on new machinery, research and development, and other business activity – means lower wages and lower growth.
And there is reasonable evidence that higher (pdf) corporate taxes do indeed cut investment (pdf).
It’s for this reason that some of us would prefer that taxation be shifted onto land and away from profits.
Nevertheless, there is a possible defence of Labour.
If begins from the fact that there’s a good reason why studies find different results for the impact of corporate taxes on wages. It’s because explaining fluctuations in capital spending is really difficult because so many things influence it.
One big fact tells us this. It is that, as my chart shows*, the share of business investment in GDP is much lower now than it was in the late 90s, despite the fact that the corporation tax rate has fallen from 31% to 19% in this time (and interest rates have too). Of course, this doesn’t tell us that corporate taxes do not affect investment. But it does tell us that many other things do influence it. As Grace Blakeley has written (pdf):
The competitiveness of the business environment in a particular country depends upon a wide variety of institutional considerations. These include ‘access to markets and profit opportunities; a predictable and non-discriminatory legal and regulatory framework; macroeconomic stability; skilled and responsive labour markets; and well-developed infrastructure’ (OECD 2008 (pdf)). For most types of business, these factors are considerably more important than the rate of corporation tax. This explains why Germany and France, for example, have continued to have higher levels of business investment than the UK despite much higher corporation tax rates.
What’s more, numerous factors have depressed capital spending lately.
One of these is uncertainty about Brexit.
Another is a scarring effect: the tech crash and financial crisis showed bosses that they could easily over-estimate future profits. That led to lower animal spirits.
Yet another are fears of a lack of future credit: although banks claim to be willing to lend now, firms have no assurance that credit lines will stay open during the next downturn. What’s more, as Jonathan Haskel and Stian Westlake have argued, businesses with large intangible assets find it difficult to raise finance because of a lack of collateral. For these reasons, firms have built up large cash piles in recent years.
And then there’s a simple lack of demand. We know that there is a ton of slack in the labour market. And the fact that inflation is low suggests there’s plenty in product markets too, all of which is reducing the need for firms to invest. As Simon says:
corporation tax plays a pretty small roll in investment decisions. The most important factor for investment in non-traded goods is the future level of demand
Herein lies a defence of Labour’s plans. It could be their other policies will boost capital spending – by reducing the chance of an economically-damaging Brexit; raising aggregate demand; and financing companies via the National Investment Bank. Yes, the medicine of higher corporate taxes have unpleasant side-effects, but Labour can treat these with other remedies.
Sadly, however, this is not certain. My concern is that neoliberalism has become performative. Decades of neoliberal ideology have taught British bosses to regard social democracy as abnormal even though it is perfectly familiar on the continent. In this way, Labour might depress animal spirits still further even though there is no logical necessity for this to be the case. If this is so, it might mean that social democratic policies are impossible, or it might mean that the job of investing can no longer be entrusted to capitalists.
* The spike in 2005 was because investment in nuclear power was reclassified then.