by Ram ben Ze'ev
In the ongoing debate about taxation, the argument that corporations should "pay their fair share" often takes center stage. Politicians, pundits, and advocacy groups regularly call for increased corporate taxes as a means of addressing income inequality and funding social programs. The premise is simple: corporations, with their deep pockets and considerable resources, should contribute more to society by paying higher taxes. However, this argument overlooks a fundamental economic truth—companies do not actually pay taxes. Instead, the burden of these taxes ultimately falls on consumers. Understanding this principle reveals why calls for corporations to "pay their fair share" may be misguided and why a zero-tax rate on businesses might be a more equitable solution.
At first glance, it seems logical to assume that when a government levies a tax on a corporation, the company itself bears the financial burden. After all, the tax is levied directly on the business's profits or operations. However, this assumption fails to account for the way businesses operate and the fundamental principle of cost pass-through.
A corporation's primary objective is to generate profit for its shareholders. To achieve this, it must carefully manage its costs, which include expenses such as raw materials, labor, overhead, and, yes, taxes. When a business incurs a tax, it does not simply absorb this cost; rather, it incorporates the tax into the overall pricing structure of its products or services. This means that the tax is effectively passed on to the consumer in the form of higher prices. In other words, every time you purchase a product or service, you are paying not only for the production costs but also for the taxes that the company has embedded into the price.
This cost pass-through mechanism is not limited to taxes. Any increase in operational costs—whether it be due to higher wages, increased raw material prices, or additional regulatory compliance—will be reflected in the prices that consumers pay. Thus, while it may appear that companies are shouldering these expenses, they are, in reality, simply intermediaries. The true payers are the customers.
When governments impose taxes on corporations, the intention is often to ensure that businesses contribute to the public good. However, because businesses pass these costs onto consumers, the net effect is a disguised tax on the public. This phenomenon can lead to several unintended consequences.
First, higher corporate taxes can lead to increased prices for goods and services, disproportionately affecting low- and middle-income consumers. These groups spend a higher percentage of their income on necessities, meaning that even small price increases can have a significant impact on their overall standard of living. In this sense, corporate taxes are regressive, hitting the most economically vulnerable the hardest.
Second, high corporate taxes can stifle economic growth by discouraging investment. Companies facing higher taxes may reduce their investment in innovation, expansion, and job creation. They may also seek to cut costs by reducing their workforce, offshoring jobs, or automating processes, all of which can lead to job losses and slower economic growth. This, in turn, can exacerbate economic inequality rather than alleviate it.
---> Follow on Twitter/X @rambenzeev and read all of RAM's articles on X
Moreover, the global economy's interconnected nature means that corporations can—and often do—relocate their operations to countries with more favorable tax regimes. This phenomenon, known as tax inversion, allows businesses to reduce their tax liability by shifting profits to lower-tax jurisdictions. While this may benefit the corporation, it also reduces the tax revenue available to the country imposing the higher taxes, ultimately undermining the goal of raising funds for public services.
Given that corporations do not truly bear the burden of taxes, there is a compelling argument to be made for eliminating corporate taxes altogether. By instituting a zero corporate tax rate, governments could remove the incentive for companies to pass on tax costs to consumers and eliminate the economic distortions caused by high corporate taxes.
A zero corporate tax rate would have several benefits. First, it would lead to more transparent pricing. Without the need to factor taxes into their pricing structures, companies could offer goods and services at lower, more competitive prices. Consumers would directly benefit from these savings, particularly those in lower income brackets who are most sensitive to price changes.
Second, eliminating corporate taxes would encourage investment and economic growth. Companies would have more capital to reinvest in their operations, leading to increased innovation, job creation, and economic expansion. This could, in turn, lead to higher wages and better living standards for workers.
Finally, a zero corporate tax rate could reduce the incentive for tax avoidance and profit shifting. With no corporate taxes to evade, companies would have less reason to engage in complex and costly tax strategies. This could help level the playing field for businesses, particularly small and medium-sized enterprises that lack the resources to engage in aggressive tax planning.
The notion that corporations should "pay their fair share" through higher taxes is rooted in a misunderstanding of how businesses operate. While it may seem that companies are absorbing these costs, they are merely passing them on to consumers. This makes corporate taxes a hidden burden on the public, with particularly harsh effects on low- and middle-income consumers.
By eliminating corporate taxes and adopting a zero-tax rate, governments could foster a more transparent, equitable, and growth-oriented economic environment. Consumers would benefit from lower prices, businesses would have more capital to invest in innovation and job creation, and the economy as a whole would be better positioned for long-term prosperity. Instead of focusing on taxing corporations, we should recognize that the true payers are the consumers—and structure our tax policies accordingly.
###
Bill White (Ram ben Ze'ev) is CEO of WireNews Limited, Mayside Partners Limited, MEADHANAN Agency, Kestrel Assets Limited, SpudsToGo Limited and Executive Director of Hebrew Synagogue