Who Pays the Tax?

by Kevin D. Williamson

In response to my piece today calling for the abolition of the corporate income tax, I’ve received a half-dozen remarks to the effect that “taxes on businesses are nothing more than a pass-through to the consumer,” citing Milton Friedman’s famous observation that corporations aren’t taxpayers but tax-collectors.

But it is not the case that corporate taxes are necessarily passed on to consumers; it’s a bit more complicated than that.

Imagine that we passed a special punitive tax of $1 billion a year on Walmart. Walmart could do all sorts of things in response, but it probably would not raise prices on consumers — because it does not really have the power to. People shop at Walmart mostly because of its low prices, and shoppers would walk away en masse if Walmart tried to pass that new expense on to them. (It’s almost as if consumers have no sense of loyalty or solidarity or social justice, and are driven by narrow, selfish financial considerations.) Consumers have veto power over Walmart’s pricing decisions, as they do for many other businesses. If you’re shopping for a new car, you can configure it online and get prices from a dozen dealers, none of which can, on its own, simply charge you more because it desires to do so.

But customers are not the only party doing business with Walmart. There are the employees, obviously; changing jobs is more difficult than changing where you buy your bananas, so some costs might be passed on to them.

But the more likely target would be the companies behind Walmart’s inventory. Everything on the shelves at Walmart is made by another company, and many of those companies rely on Walmart for a very large share of their sales. About 26 cents of every dollar the J.M. Smucker Company does in sales comes from Walmart. And while Walmart might not be able to charge customers more for a pound of Folger’s coffee, it might very well be able to pay Smucker less for it, or to renegotiate various aspects of its relationship in a way that is more advantageous to itself.  

The tax burden is spread throughout the market as part of a web of extraordinarily complex financial relationships. Measures intended to pick the pockets of the so-called fat cats and giant corporations very often end up picking other unexpected pockets instead. That’s probably good news for the evil people who own Walmart — you know, grandma, schoolteachers — but bad news for smaller businesses or those with less negotiating power.