Economic Myths: Corporation tax is a tax on capital

More Faux Lib tomfoolery in City AM:

... what has not filtered through to the public debate is the question of who bears the economic burden of [corporation] tax – is it fat cats, or could it secretly come out of wages or turn up in higher prices?

If this is confusing, this is because, for economists, a tax’s burden is borne by who it makes worse off. For example, though shops hand over VAT to HMRC, it is generally accepted that consumers bear the burden through higher prices...

Nope.

Basic logic as well as any sort of fact-based study show that suppliers bear the bulk of VAT; prices do rise slightly but output, and hence profits and employment, go down.

So what he is saying is: I will make up facts as I go along to support my preconceived notions.

And while employers hand over national insurance contributions, economists tend to think this money comes at the expense of lower wage offers than there would otherwise be.

Yes of course, you can't redeem yourself that easily though.

There then follows a load of drivel which you can dismember at your leisure. Here's my favourite bit:

First, higher corporation tax means less profit for firms and workers to bargain over.

Nope.

The amount of pre-tax profit is exactly the same; workers and employers share this between them and then each pays tax on his own bit.

Second, higher corporation tax means less relative reason to tie up investment in capital as opposed to consuming it in general, and in particular less relative reason to tie up investment in capital in a given country.

Yes, all things being equal, businesses prefer countries with a lower tax rate, but that is way down the list of concerns. Nobody is going to relocate from Oxford to Afghanistan to save a few quid corporation tax (paper profits get shuffled around a lot, but not real profits).

But…

1. "Investing" or "making profits" is not an alternative to consumption, it is the flip side of consumption, you can't have one without the other. So if you decide to 'consume' not 'invest' you are merely pushing up other people's profits and thus the amount other people will be prepared to invest to tap into those profits.

2. Corporation tax is not a tax on 'capital', however defined, in the first place.

It is a tax on profits accruing to businesses owned by limited companies/shareholders regardless of how much capital and of what type the company owns. Those profits arise if people are prepared to consume the business' output = turnover, and that turnover is in excess of costs incurred.

The profit element might stem from goodwill i.e. customer inertia/loyalty, dominant market position, low wages, monopoly rights (patents etc), owning the best sites (to trade from or rent out), simply doing everything a bit better than most of the competition, whatever.

Unbeknown to this idiot, corporation tax is anything but a tax on 'capital' as reinvested profits are not taxed and there is tax relief for capital investment (yes the capital allowances system is a bit shit, but broadly speaking it nets off). And if you set up a business with loads of capital assets but make no profit, you pay no corporation tax either.

Further, the amount of 'capital' owned by a business bears little or no relation to its profits. A well-run employment agency owns a few computers, telephones and desks, that's it; if it makes more profit than a capital intensive business like a steel works, then it pays more corporation tax.

Less capital per worker means lower productivity, and lower productivity means lower wages.

Workers/labour are capital and capital is workers/labour; capital is accumulated work/labour; if anything, taxes on wages are taxes on capital (because for a given £1 expense, the employer/investor gets less capital in return), not corporation tax.