Having worked in the finance department of a multinational organisation,I assumed that it was common knowledge that individuals as opposed to companies foot the bill for Corporation Tax. But judging by my social media accounts over the past weeks, it seems that most of the public fail to realise this. I have heard arguments that increasing corporation tax will benefit society as companies will have to pay more. Yes, the government will collect higher taxes from a higher corporation tax but the ones who be paying this higher bill is people like you and I as opposed to companies.
To put it in the simplest of terms, any company that has pricing power will simply shift the liability of higher taxes to the consumer in the form of higher price increases. Higher corporation taxes will just lead to higher prices. You need to understand that corporation tax is a cost just like labour or raw materials. So when the cost of corporation tax increases, prices have to rise as companies want to keep a stable and growing operating margin.
Just look at Amazon for instance. Why do you think it is the cheapest online retailer? It has one less cost – it hardly pays any corporation tax. Now I’m not saying the sole reason for Amazon’s discounted business model is purely to do with tax – they benefit from economies of scale and a distribution advantage – but tax is a major part.
In short, higher corporation tax has the following effects on businesses:
- Large companies with pricing power will simply shift the higher cost of tax on to the consumer in the form of higher prices.
- Smaller companies or companies in a competitive industry who don’t have pricing power will have to take the brunt of the rise in corporation tax. This would lead to certain firms shutting shop.
Personally I am not a proponent of higher corporation taxes. I believe that it just causes cost-push inflation as individuals like you and I end up paying it. So whilst companies physically pay the tax to the revenue service, the individual is stealthily taxed on it.