Why Increasing Corporate Taxes would only Hurt the Worker

Milton Friedman takes apart the "Free Lunch" Myth that somehow or other government can spend money at nobody's expense.  People who believe in this myth see a simple solution to our economic problems: Tax the corporations!  Fair enough - if the businesses and corporations are the ones bearing the cost, then we, the people, don't have to bear that cost, right?

False.

People tend to think of businesses as inanimate objects by which wealth is generated.  But while a business may require inanimate objects (such as factories or machines) to operate, the business itself is made of people. The factories and machines of a business cannot pay taxes because (even if they could write checks) they do not have the ability to own anything from which taxes can be taken (like wealth).

Therefore, taxes on corporate profits are necessarily paid by people. "Fair enough," people say, "but at least taxing the corporate profit will only affect the greedy, wealthy business owners that exploit the workers, right?"

False. Again.

Friedman explains  that taxes on corporate profit come from one of 3 sources: the stockholder, the customer, or the employee. Let's look at how each group is affected by corporate taxes:

1. Stockholder: The owners of a corporation, or stockholders, are responsible for the company's growth.  All they can do is add to a corporation's ability to grow by contributing their own money to the corporation's capital in return for a share in its ownership and shared liability.  The stockholders already contributed their own money to the growth of the corporation, and  therefore will not lose more than they already contributed to it.  However, while they may be the people writing the check, they do not bear the cost of corporate taxes.  In order to pay the cost of corporate taxes, the stockholders must decide to either increase the corporation's income or decrease the corporation's expenses. This can either be done by increasing the price of their product or decreasing the cost of labor (since capital such as machines and factories are not easily sold off as liquid resources).  Let's look at both options.

2. Customers:  This one may seem simple.  A business owner might deal with the cost of a tax increase by increasing the price of their product in the hopes that customers will pay the higher price for it.  The customers, therefore, bear part of the cost of the corporate tax by accepting the cost imposed on them through increased prices. If we are to assume that workers pay for the goods corporations produce (such as food, cars, basic amenities), then these workers are paying the corporate tax by paying the new price.  However, stockholders aren't likely to increase the price of their product because it will likely lead to decreased consumption of their product, and thus a loss in income - the opposite of what it was meant to do.

3. Employees: Since the stockholders cannot simply make more money to pay the tax through high prices and hold their bottom line (if they could they probably would have already been doing it), the burden of the tax must be paid by cutting expenses.  While a company can cut capital and land expenses by selling off their machines, factories and property (or agreeing not to buy more), they probably won't because all this can do is ruin their ability to produce (and make money).  So, they are finally left with the option of decreasing the cost of labor in order to hold their bottom line and pay the corporate tax. If a corporation is imposed with a tax, they have less money with which to pay their employees. So they are left with only a two options: pay the employees less, reduce the number of employees.  Either way, the employees (or the unemployed people looking for work) end up being the ones who have to pay the corporate tax through salary reductions or loss completely.

So for all those who think corporate taxes are good for the worker, I urge you to think again.