Corporations don't pay taxes; it's people who pick up tab

Taxes are a major political topic this year. There are a number of misconceptions about taxes and their impact on entrepreneurs and the creation of new businesses.

For example, who pays taxes? Corporations don't pay taxes, people do.

Suppose the corporate tax rate is increased. What happens? Economic studies show that the prices businesses charge increase to provide the extra money needed to pay taxes.

For example, in the tobacco litigation settlement that resulted in tobacco companies paying billions to lawyers and states, the price of a pack of cigarettes went up by almost the entire amount needed to meet the payments that the tobacco companies make each year.

Even worse, the corporate tax is a regressive tax — that is, poor people pay a much higher portion of their income in corporate taxes than do wealthy people. Statistically, smokers are disproportionately lower income people. Hence, in the tobacco litigation settlement, it is estimated that people in the bottom 20 percent of income earners pay more than half of that tax through higher cigarette prices. If a television manufacturer pays $30 in taxes per television, poor people who buy a television pay the same amount as a wealthy person — and $30 is a higher percentage of their income than it is for a wealthy person.

Another misconception is that taxes don't affect jobs. Economy.com recently reported: "If monetary and fiscal policy had remained unchanged during the Bush presidency, the recession that began in early 2001 and ended later in the year would have likely instead lasted through much of 2003. The economy would still be shedding jobs."

When President Clinton placed a luxury tax on high-priced cars and boats, major unemployment resulted in those industries.

Taxes also affect people's willingness to work. A study by economist Edward Prescott found that almost all of the difference between the U.S. labor supply and that of France and Germany was a result of the higher tax systems in Europe.

Taxes also affect entrepreneurial start-ups. Entrepreneurs are less willing to start businesses when they give half of the upside to the government in the form of state and federal taxes but take all of the downside risk. Economists William Gentry and R. Glenn Hubbard found that Clinton's 1993 tax increase reduced the probability of entrepreneurial entry by upper-middle-income households by as much as 20 percent. Another study showed that higher taxes on businesses reduced hiring and salaries.