Friday, June 06, 2008

Corporate Income Tax (1): Tax Incidence

When I was an undergraduate student of economics, I found that it was a very interesting column in Mankiw's text and I began to think about what the most efficient tax is like.

Tax policy, as Prof. Mankiw says, is not only about economics but also about political economy. When we discuss and think about how well the tax policy should be conducted, we have to keep in mind that the burden of the tax ultimately falls on people.

Mankiw: Who Pays the Corporate Income Tax?

....People pay all taxes,...the owners, customers, or workers of the corporation.

Suppose that the U.S. government decides to raise the tax on the income earned by car companies.

(1) hurts the owners of the car companies

⇒ (2) receive less profit

⇒ (3) invest less in building new car factories & more in other factories

⇒ (4) the supply of cars and the demand for autoworkers decline

⇒ (5) the price of cars to rise and the wages of autoworkers to fall

⇒ (6) autoworkers get poor

This case is about the tax falling on car companies, but if we assumed high tax on the income earned by all the companies in the US, the effect of that tax would be large.

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