I was watching I Love Lucy last night, season 1, episode 35, named “Ricky Asks for a Raise”. The episode starts with Ricky getting tutored by Lucy on how to ask for a raise. After his training, the moment comes where he asks Mr. Littlefield, his boss, for a raise, and, we learn what is keeping him from higher pay.
What?
Taxes, of course. His boss, Mr. Littlefield, answers “…taxes have come up…So you can see that I’m in no position to give you any more money.” Corporate taxes are often portrayed as being paid by corporations. This is, of course, silly. People pay taxes, period. As Mitt Romney was skewered for saying, “Corporations are people, my friend.” This is true not only statutorily (the Internal Revenue Code, Section 7701(a)(1) reads “The term ‘person’ shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation”), but, more importantly, in the economic sense that all corporate tax will end up borne by some person. Indeed, every tax increase will make a shareholder, customer, employee, or supplier, worse off—some flesh-and-blood human being bears the burden of every tax.
The tricky part is knowing which human being. If your goal in life is to impose higher taxes on rich people, then you really want the answer to be shareholders, as shareholders are generally wealthier than other people. If the incidence of the corporate tax is mostly borne by rich shareholders, then increasing the corporate tax becomes an easy way to impose more taxes on the rich. So who actually bears the burden? We don’t know. It is a hard economic question that likely changes across time and situation. But, in my view, the estimates that place the very most burden on rich shareholders still suggest that 20% of the tax is borne by non-shareholders (customers and employees).
So, how does an employee bearing some of the burden of the tax actually manifest in the real world? Here is where Ricky comes in. The taxes imposed on nightclubs went up, so, poor Mr. Littlefield could not afford to give Ricky a raise. Mr. Littlefield, as the presumed shareholder of the small nightclub, ended up worse off because of those taxes. But, 20% portion of the tax that Ricky was forced to bear meant Ricky got no raise (at least not until Lucy steps in). Basically everything we need to know about life we can learn from I Love Lucy, including the ins and outs of tax incidence.
