Nick Shaxson has written the following on the Treasure Islands blog. I thought his analyusis fascinating, valid and almost certainly understated. So, with his permission, I reproduce it here:
"One of the big arguments that's been around for as long as I've been paying attention to these things — for much longer than that, I think — is the question of where the ‘burden' of corporate taxes fall. Corporate lobbyists and some economists argue that the burden of the corporate income tax falls mainly on workers (with the subtext, you see, that the tax is therefore pretty pointless.) Others such as the Institute for Taxation and Economic Policy (ITEP) in Washington argue the opposite. The U.S. Congressional Budget Office (CBO) takes a middle position and says that it is ‘unclear' where the burden of taxes falls.
How does one test where the burden falls, in practice? You can't test this by looking at how share prices react when companies announce their tax payments. This is partly because these announcements tend to come bundled up with a bunch of other things, which make it impossible to unpick the causes of share price reactions into their component parts — but also because quite often, investors know what is coming in advance, so the reaction is often priced into the stock, ahead of the announcement.
But a few weeks ago, something happened that might constitute an interesting experiment in whether the burden of taxes falls on shareholders (that is, capital owners) or on ‘workers.'
On April 13th, stunt-masters The Yes-Men and the protest movement US Uncut got together and issued a hoax press release, taking great pains to make it look as if it came from General Electric, stating that that the company would voluntarily pay the U.S. government a $3.2-billion tax “refund” as an act of contrition. This followed a hard-hitting New York Times story noting GE's zero tax bill — a tax benefit, in fact – after earning worldwide profits of $14.2bn.
The Associated Press, and a number of others, picked up the hoax as if it were real, and the story was, in this sense, ‘live,' for up to half an hour, before word got around (initially via a Reuters story) that it was just a hoax.
The point here is that this brief episode might qualify for our incidence experiment. It came right out of the blue, and other factors such as profits announcements and so on, were stripped out.
So what happened? Marketwatch provided this analysis:
“CEO Jeffrey Immelt was purported to have informed the White House the company would be “gifting” a $3.2 billion federal tax refund to Uncle Sam on April 18, Tax Day .
And did shareholders take a hit?
GE shares fell 1.6% from their preopen high. Not a huge move, but enough to briefly trim GE's market capitalization by nearly $3.5 billion.
In other words, they said they would give up $3.2 billion in taxes, voluntarily — and the shareholders took a hit to the tune of just about the same amount, before sanity, and the share price, were restored.
Can one conclude from this that the shareholders, conscious that they wouldn't be able to palm the burden those extra taxes off onto workers, clearly recognise here that they are the ones to bear the burden of this tax?
Well, in a word or two, not really. There could well have been other factors at play there (though I couldn't find any other obvious specific news during that short time window.) They might well have factored in not just the taxes, but the prospect of a new approach to taxes from GE, suggesting that shareholders only bore some of the burden, to the tune of $3.5 billion, from a potentially bigger long-term hit. It may well have been simple, loopy, shareholder irrationality. So this episode certainly doesn't prove any argument that the true burden of corporate income taxes falls on shareholders rather than workers.
But it does provide some interesting anecdotal support for the idea.
More from the battlefield of corporate taxation here."
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It would be interesting to see how many investors actually sold their shares once the share price had dropped 1.6%? If any had then the perpetrators could be criminally liable for share manipulation? I would also be interested if any of these organisations actually ‘shorted’ the GE stock during this ‘experiment’? Surely you don’t agree with this borderline criminality Richard?
I think anyone who thinks this was borderline criminal shows remarkable lack of insight, judgement and knowledge
In that case that must be your impression of the FSA? You may recall the false rumour regarding Halifax PLC which caused their shares to nosedive? I understand that the FSA wanted to bring criminal procedures. It is a shame that all you can do is abuse people rather than have reasoned arguments!
Mens rea is what it comes down to, I think you’ll find
If the objective is to profit it’s a crime
If it isn’t it’s not
And that’s why your comments are just wrong
It’s a pity you don’t seek to understand the subject before engaging in comment
Interesting dissertion but totally irelevent in the real world. A lot of populist gumpf with no solution.
Dear Nick has let percieved fame creep into his head/
Actually, more evidence based than just about anything I’ve ever read on incidence
And I lot less assertive despite that
I guess you’re wholly unread in the subject as a result?
Really?
You don’t think there might be a slight difference in
A) giving up some earnings as a one of choice.
and
B) Facing a different cost structure on an ongoing basis?
Like, maybe costs can’t be passed on to workers in the short term, but can be in the long term?
I’m not saying that the incidence of cooperation tax DOES fall on, and only on, workers. But your “evidence” is less than worthless.
Like Justin you should read the evidence put out by academics on this issue and then you’d realise just how strong Nicke’s evidence is in comparison to the claims they make – which people like David Gauke at HM Treasury take as persuasive
But I guess like Gauke you’ve never read the so called ‘evidence’ he relies on
Well, No. As I a said though, I’m making absolutly no claims about incidence.
But that still doesn’t make this “evidence” worthwhile. Seriously, do you really think that your “evidence” becomes worthwhile, just because someone else has worse “evidence”?
Mat
Note what Nick has said
And not that if evidence is to be offered this is less value laden than most – which was Nick’s point
I have heard the argument that there should be no Corporation Tax at all (as it is an unnecessary burden on vitally important business competitiveness) and tax should only be levied when profits leave a company as remuneration to employees and share holders.
This would be fine if the rich were not so adept at ‘avoiding’ paying income taxes (i.e. Philip Green)
Some sort of international P.A.Y.E. for the rich would seem to be in order. (if only!)
I guess this is just restating the obvious large hole in the present global tax system.
Martin
Whilst tax havens and trusts let shareholders hide their identities and tax rates that makes no sense at all
But it is an idea put forward by those who want to hide their identities
And so not pay tax
Richard
Causation or Correlation?
You know what else happened the day the press release went out? I had a chocolate cookie. And naturally, from now on, every time I have a chocolate cookie, GE’s market cap will drop $3.5 billion.
Justin, Matt, jon frate, thanks for those pearls. May I suggest reading all the way to the end of a post, including the later paragraphs, before voicing opinions? It might save you a bit of time.
And Mike H – it’s an interesting theory that the players in US Uncut spend their time shorting markets. A fall of 1.6% would require a very large position to be taken before any real money is made. And if you know anything about the movement, I think you will find it rather unlikely that they did. But perhaps you have some specific information?
Richard – Shaxson and others should refresh on elementary financial economics.
The hoax was about GE agreeing to pass on a refund of taxes due for PAST periods, the net burden of which had already been shared between the company’s various stakeholders (i.e. shareholders, employees, customers, suppliers, etc.). By definition, it is impossible to re-negotiate, ex-post, the wages (and benefits) paid to the company’s workers (or indeed the number of employees and their location), or the prices charged from customers and paid to suppliers. Therefore the impact of the “gift” of the refund was going to impact exclusively the shareholders.
The price action demonstrates nothing about incidence, which is about the allocation of the burden of taxation during the the undertaking of economic activity. It may support market efficiency theories, but even then one would have to question how market participants could take this hoax seriously at all.
D
OMG, how silly of us to think that any announcement on past performance might be interpreted by the market as having any impact on future performance when, of course, that is already, of course, perfectly known.
I forgot you guys had perfect clairvoyance. So perfect you knew the hoax was coming, of corse (just as AP did (not))
I’ll remember next time and correct for it in all I write.
Darren, interesting. Earlier, someone made almost exactly the same comment on the treasure islands blog.But of course share prices reflect future, not past, cash flows. And the tax refund was to take place in future. You judge the price of a share based on what you expect to get from it in future, not what happned in the past. So the price action may – and as my blog makes clear I only say may – demonstrate something important about incidence. And the similarity of the two numbers certainly does look very fishy, doesn’t it?.
Nick – I cannot see that comment on your website, only your reply to the poster. Could you please fix your blog, or alternatively post the original comment here. Thank you.
Your own comment above contains a contradiction: immediately before the hoax, GE’s share price reflected the assumption that the burden of corporate taxation for past periods had been definitely settled, and that no further corporate tax would impact shareholders (shareholders obviously suffer countless other taxes related to their interest in the company, through capital gains taxes and taxes on dividends and buy-backs). The hoax implied that this assumption was no longer valid and that in fact the company would take a “voluntary”, incremental charge immediately attributable to shareholders. There is nothing fishy about the similarity about the two numbers. In fact it is perfectly rational. The only irrational aspect of this is that anyone in their right mind would actually believe this hoax. Says a lot about the journalistic standards of the Times and of AP, really.
Again, I would be interested to read others’ comments on your blog.