Professor Mankiew explains the tax incidence issue related to the corporate income tax. Corporations don’t pay taxes, people do. A cut in U.S. corporate tax would promote economic growth; a similar cut in the state’s corporate tax would improve the state’s economic competitiveness. Too bad Deval and Sal’s plan fall short of the real goals of tax reform: lowering rates, expanding the base (and that includes removing the costly film tax credit that subsidizes movie stars.) Fortunately the better side of McCain understands basic economics.
Cutting corporate taxes is not the kind of idea that normally pops up in presidential campaigns. After all, voters aren’t corporations. Why promise goodies for those who can’t put you in office?
In fact, a corporate rate cut would help a lot of voters, though they might not know it. The most basic lesson about corporate taxes is this: A corporation is not really a taxpayer at all. It is more like a tax collector.
The ultimate payers of the corporate tax are those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax. The corporate tax leads to lower returns on capital, lower wages or higher prices – and, most likely, a combination of all three.
A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.
Full text here: http://www.nytimes.com/2008/06…