Business Taxation: A Loose Cannon on a Dark Night

By William B. Conerly, Ph.D.

How much tax should business pay? In many discussions we sometimes lose sight of a critical fact: No business ever pays any tax. Never, ever, no matter how much we try, does our government tax business.

Only people pay taxes. Some corporate treasurer may write out a check payable to the government, but the burden of taxes is always borne by people. The people may be workers, consumers, or business owners, but they are people””like us.

Exactly which people pay a business tax is hard to determine. We may be trying to hit some fat cat shareholder, only to find that the tax has been passed on to consumers. At other times, workers may bear the tax through lower wages, or through losing a job and having to accept lesser pay at other work. In fact, of the many subjects that economists study, the incidence of taxes is one of the most frustrating. We economists simply are never sure who will bear the burden of a business tax.

Sometimes shareholders do get nicked by business taxes; but shareholders are people, too. In fact, many shareholders are ordinary people who do not think of themselves as business owners. A large portion of the stock of American companies is owned by corporate pension plans””legally trusts for the benefit of workers””and by employee savings plans, such as the popular 401(k) program. Other ordinary people own mutual funds, either directly or through Individual Retirement Accounts.

There are also individuals who own stock outright. These people are frequently retired and rely upon their investments for financial security. The median household income of mutual fund shareholders, for example, is about $68,000″”not exactly fat cat (Source: Investment Company Institute, 2005).

Certainly there are wealthy individuals who own stock, but they rub shoulders (figuratively, at least) with Middle America in their stock ownership.

Is there a good reason to tax business? If the motive is to tax the rich, this is better accomplished through personal income taxes, inheritance taxes or a direct tax on assets. The business tax is too imprecise to ensure that we are hitting the right target. In fact, a business tax may on occasion hit the poor the hardest, as if Robin Hood mistook a peasant for the Sheriff of Nottingham.

Business taxes may occasionally be supported as a more efficient way to collect a certain tax. For instance, administration of a tax on imported goods might be easier if the tax is paid by the importer rather than the ultimate consumer. Efficiency of administration is a reasonable concern.

The import tax example, however, illustrates a major argument against business taxes: They often hide the tax from the taxpayer. Consumers may not know that they are paying a tax on imported goods; workers may not know that they are paying their employer’s property tax bill; pensioners may not know that they have been paying a corporate income tax on top of their personal income taxes. To the extent that business taxation is hidden taxation, it violates basic democratic principles.

Some business taxes perform a valuable pricing function. Oregon’s weight-mile tax, for instance, charges trucks based on a formula that corresponds to the wear and tear on highways caused by trucks. That usage should be treated as an ordinary business expense, just the same as driver wages and fuel cost. These taxes (better called fees) help businesses balance costs against the value of the services they provide.

Such price-like taxes help to improve economic efficiency, if properly targeted and reasonable in amount.

In general, though, business taxation is a loose cannon on a dark night””it may fire in any direction at all, and we may not even see that it has damaged the people we are trying to help.

The slogan, “Business should pay its fair share,” misses the point. Business is simply people producing goods and services for other people. Business has never paid a tax, and it never will.

William B. Conerly, Ph.D. is Chairman of the Board of Cascade Policy Institute, principal of Conerly Consulting LLC and a member of the Governor’s Council of Economic Advisors.

  • Jerry

    I am not sure when the lefties can never figure this simple FACT out. Businesses don’t need to be taxed. Simple as that. I agree completely with what you have said above.
    There is nothing like a “fair share”. That whole notion was started by left wing people to attemtp to make tax burdens sound like good things, which they are not.
    Sort of like choice instead of murder…if you catch my drift.

  • Steve Plunk

    Well said Dr. Conerly. Many on the left use this idea of “fair share” as kindling for class warfare in taxation. The results of that warfare is a larger more intrusive government.


    The dirty little secret liberals don’t want people to know : ” Businesses pass tax increases to the costumers”.

    If the taxes are high enough that the business can’t make a profit, it fails. These are the 2 main reasons Oregons economy lags recoveries and lead recessions.

  • eagle eye

    Fine, eliminate business taxes. But please tell how you propose to make up the loss in revenue. Are you going to raise taxes on “people”? I can’t wait to hear the squawk. Or is the plan to cut spending? Please, spell out the details. I’m all ears, as always.


      I thought you were all eyes,lol!

      Any raise in taxes on businesses is a raise in taxes on people EE. Please re-read my post, its clearly stated in there, you may have missed it.

      My plan would be to eliminate the income tax as a whole and go to a straight sales tax at 7% with a set 3% tax on business profits over $100,000……….for all businesses, no breaks for the politically connected, as they have now. Of course, there would be major cost cutting to go along with this, revamping the PERS to closely mirror the Federal retirement system for all newly hired employees ( I don’t believe in pulling the rug out from under current employees). There are also a multitude of other programs and wassteful spending that I am sure we could both agree on. As FDR once said, ” its time to reshuffle the deck”. The Oregon tax code is in need of some major reshuffling, in my opinion.

      The same program seems to work fine in other states (minus the business tax), I’m sure if properly managed it would work just as well here.

    • Steve Buckstein

      ee, Dr. Conerly’s point is that business taxes are already taxes on people. We just don’t have a very good idea exactly which people pay them Eliminating business taxes will reduce taxes on those people.

      If you want to make such a change “revenue neutral” then it is up to you to specify which people you will openly tax to replace the hidden taxes those, or other, people are paying now.

      • eagle eye

        Nothing is “up to me”. It’s up to the guy proposing the change in the tax structure. Tell us what the plan is. Revenue netural? Details please. Cut spending? Details, please.

        Especially, if this is meant as a practical suggestion — for Oregon, for the whole country, for anyone — let’s have the whole plan. Otherwise it’s just an idle exercise.

        I think the guy below me, davidg, makes the salient point. Of course “people” pay business taxes, just as “people” pay all taxes. The whole question is which people pay which tax?

        • Steve Buckstein

          ee, not speaking for Dr. Conerly, but I don’t think there is any “plan” embedded in his commentary. However, contrary to your assertion, it is not so much an “idle exercise” as it is what I call an “idea exercise.” We need to think about how tax structures affect specific people. But we generally don’t know how business taxes fall individuals. So, rather than let government continue making business its tax collector, we should demand that government be honest about which individuals, or classes of individuals, it wants to tax and then propose taxing them openly.

          For example, business taxes can fall on consumers in the form of higher prices, or employees in the form of lower wages, or fewer job opportunities. They can fall on shareholders in the form of smaller dividends, or suppliers in the form of fewer orders. Rather than let these classes of individuals blame business for their reduced financial condition, if government wants to tax consumers, for example, tax them directly through a sales tax. If it wants to tax employees, tax them directly through an income tax, etc.

          I’m not advocating any of these tax strategies; I’m simply saying that government needs to stop hiding behind a middle man (business) and be open about who it taxes to fund its operations. At least then, those who are required to pay the bills will know who is asking what of them.

          • eagle eye

            “I don’t think there is any “plan” embedded in his commentary.”

            I don’t think there’s a plan either, that’s my whole point. It’s an idea exercise, not an idle exercise, you say. OK, fine. It’s not exactly an idea that nobody has thought of before. But go ahead and propose it to the legislature, propose eliminating business taxes and making them up with higher income taxes. See how far that goes. Or perhaps you’d rather cut spending? Fine, let’s hear the details.

          • Steve Buckstein

            ee, of course I’d rather cut spending. I believe less than 10% of Oregon’s General Fund comes from corporate taxes, while over 80% comes from personal income taxes. As Jerry offers below, we should first cut spending to make up any revenue loss from ending corporate taxes. I will not propose a specific plan here because that’s not the point of this post.

            And, of course others have figured out before that business taxes are actually paid by individuals. But, either a majority of legislators haven’t accepted that fact yet, or they know it but aren’t willing to do anything about it.

          • eagle eye

            OK, we should cut spending 10%, but let’s not worrry about the plan to do so. Good luck with going anywhere with that in the real world.

            On another topic — your institute used to publish figures on how Oregon compares with other states in various spending categories — it was pretty interesting, Oregon’s gold-plated prison system, other categories.

            I haven’t seen that from you in quite a while, since 2000 maybe? Why did you stop and why not start it up again?

            Perhaps Oregon spending is not out of line anymore with the rest of the states?

          • Steve Buckstein

            ee, Cascade’s last report comparing Oregon state and local government spending to other demographically comparable states was published in 2004. It’s at

            We are analyzing more current data right now and hope to publish an update in the near future.

          • eagle eye

            Thanks, it is interesting. Take a look, readers. Oregon high on police/prison spending, high on health/hospitals, about in line on schools, low on highways.

            Data were from 2000, kind of out of date for a 2004 report. I hope you can get more up to date on the next go-round.

          • Steve Buckstein

            ee, getting comprehensive data sets on all states takes more time than we’re happy with, but the next update will be as current as possible.

          • eagle eye

            As with my comment below — doesn’t the data come from the U.S. Census and isn’t this updated each year? I know making the report from there is a lot of work, but a report that is 4 years out of date is very easy to ignore.

          • Steve Buckstein

            While the Census data is updated regularly, it is not adjusted to take account of the demographic differences in the states. The data series that allow those comparisons to be done are not as current. We expect the time lag in our next update to be much shorter than four years, but there will still be some lag.

          • eagle eye

            Another thing. There has been a category called “financial management” in these comparisons, to the tune of several hundred million $$ per year. Oregon has been very high here. This is not PERS trust fund expenditures, it is something else.

            Do you know what “financial management” entails and why it comes out so high in Oregon? I have never been able to get an answer to this.

          • Steve Buckstein

            ee, where do you find “financial management” in the report? There is a category, “financial administration,” in Table 2 on page 6 where Oregon spends 195% of the national average. I think I know what that consists of, but I’ve asked the authors of the report and will let you know here when I get the definitive answer.

          • eagle eye

            Yeah, “financial administration”, I was remembering it from years ago. Not from your report but as a generic category in the U.S. Census figures which are the starting point for reports such as yours.

            And my recollection — which you confirm — is that Oregon is — or at least was — very high in this category. And I’ve always wondered what it is and why Oregon is so high, is there a good reason or is it really excessive expenditure?

            And why has nobody ever picked up on this and made an issue of it? Unlike the other categories. Probably because eyes glaze over on something that nobody understands.

            If you can tell us what it is, I would be very interested.

          • Steve Buckstein

            ee, according to the author’s of our report, Financial Administration is the State Treasury Dept., the Department of Revenue, the State auditor and other types of fiscal officer costs. They aren’t sure if SAIF is accounted for in this category since many states don’t run their own accident insurance funds. Hope this helps.

          • eagle eye

            That sounds reasonable. I DOUBT that it includes SAIF because there is another category “Insurance funds” or “Trust funds” that I believe includes PERS, I would think it would include SAIF too.

            So the question is why is Oregon apparently so far out of line (about double, to the tune of 100’s of millions/yr) on this category?

            I hope you will keep this in mind in your next report, it could use some good publicity.

          • Steve Buckstein

            ee, the main purpose of these reports is to adjust spending in major categories (such as education, health care, transportation, and criminal justice) for demographic differences among states. For example, you might expect a state with lots of school age children to spend more on K-12 education than a state with mostly retired people. I’m not sure how “financial administration” spending can be adjusted for such factors, but the authors are aware of your question and we’ll see what they can discern. Thanks for asking.

          • eagle eye

            I appreciate the value of adjusting for demographic factors — income per capita seems the most relevant, but there are others — but there’s also the great value of showing where Oregon is out of line with other states. Generally in the past out of line on the high side. It’s very interesting, for example, to see how expensive law enforcement is here, or to see that schools are over or under funded (comparatively). My general impression is that Oregon is more in line than it used to be, due to the end of the boom of the 90s.

            But re the financial administration, whether it can be adjusted properly or not, it’s a real RED FLAG that it is so far out of line nationally. Why is it almost double per capita here? That is a fairly big pot of money that nobody knows about or pays attention to. Adjusted for demographics or not, it deserves to be publicized, probed, and an explanation or change demanded. Again, I think you would do a service in focusing on this next time.

  • davidg

    The whole political purpose in having multiple forms of taxation is to (1) make people believe that someone else pays the tax, and (2) hide from each of us how much we actually pay for government.

    Nevertheless, I think Conerly’s article seems to make a fundamental error about who pays taxes. The tax burden is not equally shared. Not everyone pays every tax. It is possible to shift a heavier burden onto some, and a lighter burden onto others. The fact that a business passes on its taxes to its customers does not mean everyone pays that tax. I pay the tax only if I am a customer of that business. I don’t drink beer. Therefore I don’t pay the beer tax no matter how high you make it. No wonder I think the beer tax is good idea. Someone else pays it!

    Politicians divert a lot of our energy trying to get us to figure out the best and fairest tax. That discussion becomes trivial if we cut back the size of government so that horrendous taxes are unnecessary.


      A straight sales tax is the best choice in my opinion. Its harder for people to cheat on, it can encompass internet sales, no write offs at the end of the year from your state income tax, the kicker law goes away…etc. Without write offs, many who pay little or no taxes will have no choice but to pay. Food and Medicine excluded of course.

      I saved all my receipts last year to see if it would be better to have a sales tax. With my 9% income tax payments I paid a lot more on paper but after taking my deductions I noticed that I would have paid approx. 20% more had this state had a 7% as opposed to the income tax. Kinda shocking!

      Granted, this was just one person but I’m a fairly thrifty spender. I think there could be something to be said about going to a sales tax in leiu of the income tax.

      • eagle eye

        It would be fine with me or a 5% sales tax (approximately) in return for cutting the income tax in half (approximately).

        I’m afraid in this state though that’s a tough tough sell. I don’t get it, but that’s how it is.

        • CRAWDUDE

          Sadly, I’m afraid the majority of voters do not trust the government enough to let them have both taxes. They’ve tried putting those ideas on ballots a few times with bad results, though the cuts in the income tax wasn’t as much as you’ve suggested. I think that your idea might fly as long as it stayed in the hands of the voters to raise or lower the rates when necessary.

          I’m afraid we’re stuck with the system we have for a while…..but its fun to dream every now and then:) Have a great Tuesday.

  • Jerry

    The dirty secret here is you DO NOT HAVE TO MAKE UP ANY “LOST” MONEY. Simply cut spending. We could start with the cultural trust and go on from there.

    • dean

      Jerry…the “cultural trust?” How much is that costing us?

      I’m with Eagle Eye. You want to change taxes up or down tell us what programs you would cut, and if you eliminate the paltry 10% of the state budget now paid by corporations (I think it was 25% or higher in the 70s) tell us how many fewer state troopers, more potholes, fewer jail inmates, or fewer teachers we get in the bargain.

      • Jerry

        It does not matter how much it is costing us…there are literally thousands of equally stupid state programs that could all be ended today and NOT ONE person would even notice.

        • eagle eye

          Jerry — if it’s that simple, it should be possible to find a candidate to run with it and win. I am waiting!

          • Jerry

            No candidate wants to end the status quo, which is power and control in Salem. That does not change the fact that there is wanton waste in Oregon government.

  • William Neuhauser

    Two companies, one making money, the other losing money. The customer is “paying” for taxes in the price of the profitable company but not for the unprofitable company, even though the customer is paying the same amount to each.

    You’re trying to make out that the tax tail is wagging the business dog. I don’t think so. Oregon agriculture has some of the lowest tax rates around, but the unprofitability of agriculture, as with most businesses, is driven primariily by other factors.

    • Steve Buckstein

      William, I don’t think anyone is arguing that “the tax tail is wagging the business dog.” Of course there are many other factors at play. But the Oregon Tax Incidence Model does show that changing the corporate income tax by a specific amount, either up or down, has a bigger impact on the economy than the same change in personal income taxes.

  • David from Eugene

    This businesses don’t pay taxes is an interesting but invalid argument. Yes, business get the money they pay taxes with from people but then people for the most part get the money they pay taxes with from businesses. And once capital gains and inheritance taxes are eliminated all the money people use to pay taxes will come from businesses. Ergo businesses pay all the taxes.

    It is also important to note that in some cases the people providing the money to the businesses are not Oregon tax payers (i.e. they live some other state or country). Then there is the fact that business also use governmental services, some of which exist primarily for their benefit.

    Someone inquired as to why there was opposition to sales taxes. My take on it is that once the apparatus to collect them is established it is too easy to raise them. In California the game was to propose a list of projects to be paid for with a fraction of a cent tax. To the uninformed voter it looks like a good deal all these neat projects and it is only ¼ of a cent addition to the sales tax. Then some other taxing entities doe the some thing and soon the 5% tax is 8-10%. The best way to prevent this is to never let the apparatus be set up in the first place.