There is a common misconception that corporate taxes are mainly absorbed by shareholders; most early research has centered on that aspect, with numerous studies to support that assertion. But more current analysis is suggesting that consumers bear the brunt of corporate tax increases through higher retail prices. Several studies show that consumers are actually paying up to half, if not more, of this burden.
The first of its kind, a 2020 study hoped to figure out how much of an impact corporate taxes have on consumers. Researchers determined that a one percentage point increase in the corporate tax rate leads to a 0.24 percent increase in retail product prices, and that approximately half of total corporate taxation falls on consumers. Shareholders bear 20 percent with workers carrying the remaining 28.
Building on this study’s approach, a set of scientists conducted similar research in Germany. They found that a one percentage point increase in a particular town’s corporate tax rate raises the retail prices of products by 0.4 percent, regardless of which municipality they are sold. They further discovered that for the most part, only certain stores were affected: drug and discount stores came out unscathed; supermarkets and “hypermarkets” (large stores with a wide range of goods) manifested significant increases.
Additionally, firms and products with larger market shares do not necessarily absorb more of the increase. Their market power allows them to choose to shift the tax incidence to their consumers rather than their workers, something smaller firms tend to do. They also conclude that larger firms are able to “shield their shareholders from hikes in corporate taxes.”
Another study conducted in Germany investigates the effects of corporate taxes on gasoline prices. Finding that a one percentage point increase in the local business tax rate raises gas prices by about 0.1 euro cent per liter, consumers bear roughly 64 percent of corporate taxes. The burden is greater on gas stations with limited tax planning opportunities or those with less market power.
The U.S. Chamber of Commerce finds that even just a one percent increase in corporate taxes would have catastrophic effects in each state across the nation, for consumers, workers, and shareholders. California, for instance, would see nearly $6 billion in lost wages for workers, nearly $11 billion in higher prices for consumers, and over $4 billion in lower returns to shareholders over a ten-year period if the federal corporate tax rate increased from its current 21 to 22 percent.
Corporate taxes hurt poor households more than any other; they are the most affected by price increases, especially on basic household goods, potentially forcing them to forego goods and services if they become too expensive.
Because of their effects on prices, corporate taxes have similar ramifications to sales taxes, and they are not as progressive as often asserted. Since corporate taxes impact consumers through higher prices, they hit households quite differently, depending on the income bracket and discretionary budget.
Unfortunately, the prevailing assumption that corporate tax increases are borne by a company’s owners is held by too many policymakers and government agencies, thereby causing them to underestimate the impact these taxes have on consumers. The unintended consequences can wreak havoc on an economy, as consumers are forced to tighten their wallets, and company sales could potentially suffer.
Policymakers at both the state and federal level should think twice before raising corporate tax rates.
Kristen Walker is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.