Monday, February 16, 2009

Who pays corporate income taxes? 

Here's a case where the news completely misunderstands what it is reporting on. �An AP report on the new Minnesota Tax Reform Commission report is headlined by our local paper "Tax Plan Targets Shoppers, Smokers".

Shoppers and smokers might have to plunk down more pocket change at the cash register to improve Minnesota�s business climate, under a proposal released Friday.

That's the first sentence, and it portrays businesses as separate from households. This is of course not true. The Tax Incidence Study done every two years here in Minnesota shows that of the $780 million collected in the corporate franchise tax, much is shifted to others. The report states that, while the taxes are legally paid by businesses, they are "...partially shifted to consumers (in higher prices) or in some cases to labor (in lower wages). Only a portion of business taxes are borne by capital owners as a lower rate of return on their investment." (p. 32)

To see this, take a look at the incidence report's Table A-1 at page 77. �For a $120 million in additional tax on capital, only $61 million is borne by Minnesota businesses. �Minnesota labor receives wages $3.8 million lower because of the tax. �Most of the tax is borne by consumers because businesses raise prices to shift the burden of the tax onto purchasers of their products. �Turning that into a sales tax does not mean a dollar transfers from consumer to business, as the corporate tax was mostly being transferred to consumers anyway. �Consulting Table A-2 we find that $.42 of each dollar of corporate tax was transferred to Minnesota consumers, and another eight cents to labor.

Alas, that point seems lost on our political leaders, even Governor Pawlenty�who created the commission:

First reactions from state leaders � including Gov. Tim Pawlenty, who appointed the 15-member commission � were tepid. Pawlenty spokesman Alex Carey said the GOP governor wants to make Minnesota more business-friendly but isn�t embracing the proposal to expand the sales tax.

�He does not like the idea of raising sales taxes on consumers,� Carey said in an e-mail.

House Speaker Margaret Anderson Kelliher also had reservations.

�It�s interesting to raise taxes on Minnesotans to pay for a corporate tax cut for people who may not even be Minnesotans,� said Kelliher, who added that she plans to study the report.

Kelliher is correct, that the tax is borne by out-of-state capital holders. That's because 90% of corporate capital is owned by out-of-staters.� But that means as well that a lowering of their tax rate will pull capital from other states into Minnesota, rather than the other way around. �Do you think Speaker Kelliher would be interested in having capital move back into Minnesota? �We already have a tax rate much higher than the national average. �Governor Pawlenty has proposed simply to get to the average by halving the rate. �How much more capital would we gain if we went to zero?

The commission report is a nice piece of work (full disclosure: �I had a chance to review and comment on the report before its publication.) �There's a lot more in it than the part the newspapers have reported. �My bias is towards the kinds of demographic concerns expressed in page 10 of the report:

The number of Minnesota workers reaching retirement age jumped 30% in 2008 as the first members of the Baby Boom generation turned 62. The number of workers turning 62 is expected to double by 2013, compared with 2006 levels. Meanwhile, the rate at which younger workers enter the workforce is leveling off, and the number of Minnesotans in the 18-25 age group will decrease in the next 15 years. Minnesota�s labor force grew 1.5% annually during the 1990s, but annual growth will slow to 0.1% by the 2020s.

As boomers age, leaving a slower-growing workforce in their wake, they will reshape Minnesota�s revenue and spending as never before. Aging workers will likely pay sharply lower state income and sales taxes once they retire, even as their health-care needs increase. These demographic changes will increase pressure to raise business taxes to solve revenue shortfalls and finance spending growth as baby boomers retire. To grow, Minnesota must expand its tax base by attracting new or expanding businesses and the high-quality jobs they bring. It�s crucial to fill the gap without resorting to anti-competitive tax increases.
It is unlikely that this gets dealt with in the current legislative climate of deficit panic, but someone needs to save the Commission's report to implement when the panic subsides.

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