Kimberley Clausing’s Proof That Corporation Tax Falls Upon The Workers

This is the second time today – the other was from Paul Mason – that I’ve seen the claim that Professor Kimberley Clausing proved that corporation tax is not incident upon the wages of the workers. This is not what Clausing did prove and I know this because I went and asked her.

So, Richard Murphy:

It is the work of Prof Mike Devereux at Oxford that, for example, underpins the IFS claim that corporation tax increases are actually paid for by wage cuts. The claim has been resoundingly shown to be unfounded by Prof Kim Clausing, but it persists.

Deveraux’s claim is toward the stronger end of the spectrum, certainly, but entirely within likely bounds. The work of Joe Stiglitz shows that it might be too weak a claim in some circumstances.

But to he Clausing claim, this is amusing:

Finally, just because this so amuses me, there was a fascinating paper that showed that, actually, the different tax rates in these different developing countries seems to have no effect on how much the multinationals invest in them. That rather seems to shoot my fox as one Richard Murphy insisted it did:

Worstall:

The Clausing paper argues that one good reason why the incidence is not upon labour is because corporates have become very good at shifting tax liabilities around through debt financing, cross border sales and so on.

In fact, all of the things that you campaign against. It does become pretty difficult at that point. Corporate taxation does not fall on the workers because companies dodge it: therefore we must stop corporate tax dodging so that the incidence will fall on the workers?

Murphy:
I suspect Kim Clausing would laugh herself silly that someone could read such an absurd argument into her paper In that context it’s only fair to say I last saw her at lunchtime.

Worstall:

Excellent: so you might be able to ask her about that interpretation of the paper, then?

Murphy:
I know what she’d think of it It’s very clear she thinks there is no empirical evidence on any basis of a link between corporate tax and labour rates As her paper very clearly and robustly shows.

Worstall:

So I sent an email to Professor Clausing … ”I read that as stating that precisely because many multinational firms are “tax dodging” therefore the incidence of the corporate income taxes not upon the workers in the form of lower wages. …

In wider terms, it is precisely the jurisdiction shopping that such companies undertake that explains the lack of evidence of an impact upon labour of the corporate income tax. I just wanted to check that that is the implication that you are making in this part of your conclusion?” …

Her response?

“Thank you for your email. Yes, that is the implication.”

The reason Clausing’s paper shows no incidence of corporation tax upon wages is because the corporations are already dodging the corporation tax. This tells us nothing about the incidence of a corporation tax that actually bites.

The full conversation is here.

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richard verney
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richard verney

Companies do not pay any tax. All expenses incurred by a company, including the tax that it pays, is paid by the consumer who buys the goods and/or services of the company. Thus, for example, Tesco does not pay the tax on its profits, but rather the customers, at the checkout, pay the tax of Tesco. Say every time a customer shops at Tesco, some £1 or £2 or £3 of the checkout total, represents Tesco passing onto the customer, the tax that is being levied upon it. The same applies with all companies. This is very clear to see,… Read more »

NotPC
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NotPC

Government could be made smaller? Heaven forbid. Do you mean my taxpayer funded super salary could disappear? Richard, how could I afford my nightly Islington soirées.

Quentin Vole
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Quentin Vole

All expenses incurred by a company, including the tax that it pays, is paid by the consumer who buys the goods and/or services of the company.

Very likely, but there are other possibilities. If a company incurs additional expenses (say an increase in CT rates) then it can only either:
(a) increase prices (as you say);
(b) reduce other costs by sacking staff, reducing pay, or squeezing suppliers (but this assumes the company is overpaying in the first place); or
(c) make a smaller profit – which means a reduced share price and hits our pensions and other savings.

jgh
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jgh

I’d argue that corporation tax aren’t expenses. They are paid out of what is left over after all the expenses are paid. By definition you can never not afford to pay your taxes, because if you’ve got nothing left after paying the expenses of operating your business, there’s nothing left to tax. 20% of £0 profit is £0. You don’t raise your prices to pay your taxes, you raise your prices to pay your expenses. Of course, some of those expenses are taxes – import tariffs, unreclaimable VAT, land tax, fuel duty, but they are all expenses of converting crud… Read more »

Dougie
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Dougie

A distinction without a difference, really. Companies that don’t make a profit make a loss. Keep on making losses and you go out of business. Go out of business and the Treasury loses a lot more than just the CT revenue.

Mr Yan
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Mr Yan

“Government could be made smaller.”

Which is of course why it won’t happen.

jgh
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jgh

If companies pay higher wages they will automatically pay less corporation tax because there will be less money left over after paying the staff for tax to be levied on. No sweatheart deals needed. In fact, we’ve seen this in the wild with tech companies paying their staff oodles of wages, to the screaming outrage of Lefties as this results in there being nothing left over to levy any corporation tax on.

SadButMadLad
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SadButMadLad

And then they pay more tax in other ways such as NI

jgh
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jgh

In fact, if a company pays as much in wages as possible, with nothing left over to levy Corporation Tax on, the Exchequer actually collects more money via National Insurance and Income Tax, and subsequent consumption taxes.

Dougie
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Dougie

Which explains why putting up the rate of CT can reduce, not increase, the tax take.

Jim
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Jim

“We have a ridiculous situation in the UK, where the Treasury collects tax levied upon a company (which tax is factually paid by the consumer), but then pays much of the money collected, back to the workers, in the form of in work benefits, because the company is employing staff, at below a living wage.” Well its not that ridiculous, given that the welfare system is needs based, while wages aren’t. What is a ‘Living Wage’ if you are a single person living with your parents, vs a single person with rent to pay, vs one half of a working… Read more »