People Pay Taxes

Sep 25, 2009 | Taxes

The simple truism that tax professors try to teach, and politicians try to ignore, is that people pay taxes. All taxes are passed onto people in one form or another. The corporate income tax for instance, shows up as lower returns for shareholders, higher prices for consumers, and lower wages for workers. People might not see the tax as directly as they do a sales tax, income tax, or payroll tax, but there is no getting around that the burden of shouldering the tax falls to them.

But in politicians’ never-ending attempts to run from the need to raise taxes on—gasp—actual people, many policies are crafted to make it appear that a tax burden falls on less sympathetic entities, such as energy or insurance companies, to take two recent examples.
That is one of the reasons many policymakers prefer a cap-and-trade system to an outright energy tax.  Much of the pushback has been political concern that the costs of the trading permits would be passed onto consumers. Well yes, of course they would. That creates much of the benefit since charging people more for using energy would incentivize them to decrease their demand.
Similarly, in the Senate Finance health reform bill, the main tax increase would be on so-called “Cadillac health insurance plans” conjuring up the image of bloated insurance executives and their companies footing the full bill. But companies don’t actually foot tax bills. While the policy change might lead to lower CEO compensation it would surely also lead to the costs being passed on to consumers as well in the form of higher insurance premiums. It’s not a bad policy, we just shouldn’t pretend it holds consumers harmless.
Ideally, we would just implement a straightforward energy tax and tax workers directly for their employer-provided health insurance.
Given that the government needs revenues, there will be more to come. A guest opinion piece in the Financial Times today on the benefits of a transaction tax, argues for an idea we will be hearing much more about in the coming months: levying a new tax on all financial transactions. The case will be made that such a tax is a fair way to make the companies that benefited from “bailouts” repay some of what they owe. There are arguments for and against such a tax, but no one should be persuaded that ultimately it won’t be paid for by people—all taxes are. The considerations should be which people will pay and what the effects on saving versus consumption such a policy would have, not whether companies rather than taxpayers should bear the new burdens.
An interesting and related discussion has been taking place on some of our favorite blogs. Donald Marron has thought through when is a tax a tax here and here, providing some interesting observations about how to navigate the grey lines, and Diane/Economist Mom has wisely concluded she doesn’t care what we call it, we should just do it.