Tax policy economists spend an inordinate amount of time analyzing the effects of corporate income taxes (CIT). They are important, but so are many other government policies affecting business, including other taxes on business.
A recent study, the 14th annual EY/Council on State Taxation study of total US state and local business taxes remitted by both corporate and non-corporate businesses reported a total $707 billion in 2015. State CIT of $67 billion was less than 10% of total state and local business taxes.
Total US federal CIT in 2015 was $345 billion (according to US BEA NIPA accounts, less Federal Reserve earnings), which is less than one-half of the $707 billion in total state and local business taxes. Property taxes on business of $258 billion and sales taxes on business inputs of $151 billion were the same size as total US corporate income taxes in 2015. Employer contributions to federal government social insurance totaled $568 billion. With roughly half of total US business income not subject to corporate income tax, a focus on CIT is missing a lot of the business tax action.
Whether capital owners, consumers or workers bear the burden of specific taxes remitted by businesses is important in analyzing the economic effects of business taxes. More work on the incidence of all business taxes, including the CIT, is needed.
The geographic incident of tax matters for business decisions on where to locate economic activity: whether source (origin)-based or market (destination)-based. Property taxes, sales or VAT on business inputs, employment taxes, withholding taxes, and other miscellaneous taxes and charges are typically origin based. These affect the cost of operating in a particular country or jurisdiction to the extent those taxes are not offset by government benefits received.
Origin-based non-CIT taxes should be expected to have similar negative effects on business location decisions ("competitiveness") as origin-based components of a CIT. Thus, considerations of competitiveness need to be more comprehensive in terms of all business taxes and at all levels of government.
It is not just taxes but also other government incentives, regulations, infrastructure and services that affect firms' production costs in a particular jurisdiction. Empirical analyses of CIT that ignore non-corporate income taxes and other government support or costs to business are missing important economic factors in businesses' location decisions.
Tom Neubig and Robert Cline