Who pays tax? We all do of course (or at least most of us). But who really bears the financial burden of an individual tax? That’s a rather more complex question – and one that isn’t asked enough.
Andrew McPhillips, economist at Yorkshire Building Society, last week called on the Chancellor to change the law so that stamp duty is paid by sellers of homes rather than buyers. “[This] would reduce costs for first-time buyers, helping more people to get on the property ladder,” he said.
To first-time buyers this might sound a good idea. Indeed, why not give this beleaguered group a break by lightening their tax load? But McPhillips’s logic is the sort that causes economics professors and public finance experts to weep tears of frustration.
For it ignores the fact that other things in a market are very likely to change in response to shifting the nominal target of a tax, in this case the asking price. Those selling a home will surely respond to a large new stamp duty bill with a commensurate rise in the asking price.
So first-time buyers would be no better off in substantive economic terms – it is buyers who will end up paying the tax even if it’s nominally levied on to the seller.
The same logic applies to Value Added Tax. This is paid to HM Revenue & Customs by retailers and companies. But most of us realise that it’s really we consumers who pay the VAT because when the rate increases, prices rise. We had vivid proof of this when George Osborne raised the rate from 17.5 per cent to 20 per cent in 2011 and most prices immediately rose in response.
But the story of who ultimately pays tax or fees, known as “incidence”, is not always so obvious. When the Government said last year that it would ban lettings agents levying fees on tenants, some said this would merely push the fees on to landlords, who would put up rents in response, leaving tenants no better off. Yet the price of shares in estate agents dropped sharply in the wake of the decision. This suggests that those fees have been a major source of profit for the estate agent rather than an unavoidable transaction cost and that landlords will be better placed than tenants to resist being gouged. The incidence of that regulatory change would seem to fall on estate agents, despite the objections raised.
Business rates are a tax payable by firms based on the rentable value of the property they occupy. But a firm will generally want to secure a certain rate of return on their invested money and efforts regardless of such tax changes. So if business rates rise (as they are set to do in many swanky districts of London) then businesses should, in theory, seek to renegotiate their rent downwards to reflect that shift. Thus the tax should, according to the textbooks, be ultimately borne by landlords rather than firms.
Some evidence suggests this shift in rental prices does happen in the end. Yet it plainly doesn’t happen instantaneously for the simple reason that firms do not tend to renegotiate their rents with their landlords every year. Thus much of the initial cost of any increase does fall on firms, or rather the people who are involved in those firms.
Corporation tax is nominally a tax on corporate profits, prompting many people to assume that companies pay it. But companies don’t pay tax, only people do. The question is: which people? Many are convinced that the shareholders of the company pay the tax in the form of lower profits and dividends than they would otherwise enjoy. Others insist that workers pay the tax because the company responds to the tax by hiring fewer workers than it otherwise would, or by paying its workforce less.
There is no consensus view among researchers over who bears the burden of corporation tax. Empirical research points in different directions. The answer is likely a mixture of the two and the relative share will probably depend on the company in question, the structure of the local economy and the institutions of the society in which the tax is levied.
Yet the fundamental point is that all taxes will ultimately be paid by someone – and it may well not be who you’re invited to believe.