Incidence: Who Pays Taxes on Corporations?

We talked a lot about tax incidence earlier this term: who ends up actually paying taxes? Firms or consumers? This is a big debate in politics. Broadly, Democrats are in favor of taxing corporations as a way to tax business owners while Republicans oppose taxing corporations since corporations will pass the taxes along to consumers. Democrats think that businesses will pay most of the taxes that are placed on them while Republicans think that taxing businesses is really just a way to secretly tax consumers and workers.

How much corporations actually pay when you tax them is also a long running debate among economists. A paper published in 2023 by Malgouyres, Mayer, and Mazet-Sonilhac (MM&M) used state of the art techniques to try to bring the debate into the modern age. They find that business owners only pay about 25% of the taxes we place on their businesses, and pass off the rest to consumers and employees.

Previous estimates were that business owners paid around 40% of the taxes that were placed on them. Why are MM&M's estimates lower?  They take into account that firms change locations to avoid paying local taxes, and that when firms move, their productivity changes. 

The US is currently in a major economic transformation. The South is producing more than the Northeast for the first time in history, in large part due to workers and firms leaving the Northeast states with high taxes and housing shortages. MM&M's paper highlights that this is costly: not only do firms that move have to pay high moving costs, their new locations may be less productive than their old locations were.*

*There are many other reasons this massive internal migration is costly, this is just from a firm perspective.