The Signal published a letter May 21 written by Stephen Maseda under the caption, “Pipe Dreams on Corporate Taxes.” His letter was written in response to a letter submitted by another reader and to my column, both of which were published on May 6.
Mr. Maseda accurately chronicles the post-war corporate tax rates. However, his commentary on the division of corporate activities to take advantage of low tax rates on the first $25,000 of corporate income failed to mention this loophole was closed more than 50 years ago by the Tax Reform Act of 1969.
In his penultimate paragraph, Mr. Maseda stated that my column left out an important point on which almost all economists agree — corporations pass their taxes onto others. He claimed that corporations pass taxes onto employees in the form of lower wages and onto customers in the form of higher prices. This is part of the mythology surrounding the Tax Cuts and Jobs Act that simply is not true.
After the corporate tax rate cut, corporations got to keep an incremental 14% of their taxable income effective Jan. 1, 2018. If you work for a corporation, did you get a 14% salary increase? Very few people did. Clearly most of the tax savings were used to buy back stock and enhance shareholder value for the reasons indicated in my column. Wages and salaries are determined by prevailing market conditions, which are typically beyond the control of an employer.
The concept that corporations pass taxes on to customers is equally fallacious. All businesses, whether or not incorporated, try to pass whatever costs they can on to consumers. As any college student who has taken a macroeconomics course will tell you, when businesses attempt to pass costs, including taxes, on to the consumer, they increase the price of the goods and services they provide, which means fewer customers will purchase the product. When the price goes up, demand for the product decreases to some extent depending on price sensitivity. The decrease in marginal revenue resulting from the price increase is the portion of the costs borne by the business. Unless there is an insatiable demand for the product, corporations will absorb some portion of their tax burden.
Jim de Bree