On this unholiest of days (ironically falling during Holy Week), we don’t need to be reminded that taxes are a pain, that the tax code is overly complicated and unfair, that it violates our financial privacy, and that we just generally hate taxes.
But there are some things that we do need to occasionally remember or even learn for the first time.
Perhaps most important, our politics would benefit if people understood that only people pay taxes.
Businesses don’t pay taxes. Corporations don’t pay taxes. Wall Street doesn’t pay taxes, but neither does Main Street. Only people pay taxes.
This is not just a bit of cute rhetoric. It’s true that businesses submit taxes to the government and have to comply with that part of the tax code, but ultimately all of a business’s taxes are paid by some mix of its customers, its employees, and its shareholders.
Some portion of a business’s taxes is passed on to customers in the cost of goods and services. So when you buy groceries, you are paying some portion of the grocery store’s taxes, the wholesaler’s taxes, and the farmer’s or manufacturer’s taxes. In the past we’ve called these “hidden taxes.”
But the market often won’t allow companies to pass all of their taxes through to consumers, so their shareholders also take a hit in the form of lower returns, lower dividends, etc. And you are probably a shareholder, through your IRA, 401k, pension or other investments. The returns on all of these are reduced somewhat because you absorb some portion of the corporate taxes in your portfolio.
Finally, employees bear some portion of their employer's taxes in the form of reduced compensation. In the policy world, trying to figure out who actually ends up paying the taxes of businesses is called tax incidence, and it’s complicated.
If, in an ideal world, we had a zero tax rate on business income, as a consumer you would pay lower prices, as an employee you would earn more, and as an investor you would enjoy higher returns. Sounds great, doesn’t it?
Except you’d also be paying higher taxes on your higher income and higher investment returns. But there would still be a net gain because of economic efficiencies gained through reduced compliance costs.
When voters support taxes on business they think they’re getting a freebie, because some other entity is paying them, but they’re really voting for higher taxes on themselves. Government uses this fiction to pay for more spending and bigger government. Voters think they are getting something for nothing, but they aren’t.
Now, about tariffs . . .
April 15, 2025