If a little knowledge is a dangerous thing.....

…..then believing the wrong thing is worse:

…..after Mr Hunt's earlier decision to reinstate the planned corporation tax increase from next year.

Writing in this newspaper, Mr Malthouse said that companies simply pass on tax to consumers, stating: "They just price it in as an overhead, so consumers pay tax for them when we buy their goods or services."

This is simply untrue about corporation tax. Now, whether it’s Mr. Malthouse who believes this untrue thing, or the reporters here, Mssrs. Malnick and Diver (respectively, Sunday Political Editor and Whitehall Correspondent of the Telegraph) doesn’t particularly matter. If we’ve such senior establishment types believing something that is wrong then we’ve a problem. For the policy agreement that comes out of an establishment that believes wrong things is going to be, well, wrong, isn’t it?

It is true that corporations don’t pay tax. They might sign or hand over the cheque but any and every tax makes the wallet of some live human being lighter. There are, after all, only us and our wallets out here to carry the burden of a tax. No, a legal person like a corporation is not a live human.

The study of whose wallet gets lighter is that of tax incidence. With corporation tax there are the usual three groups who might get their wallets lightened. The capitalists, the consumers and the workers. Those are the three groups in play here, so it’s some combination or mixture of them.

To try to pin corporation tax upon consumers we have to assume that corporations both set prices and also leave profit on the table when they do so. For it is only possible to raise your prices if you have the power to do so and also that you’ve not done so already.

Players in a competitive market do not have the power to raise their prices unilaterally, viciously greedy capitalists who do have that power in uncompetitive markets will already have done so. A change in corporation tax rates does not, directly, lead to a change in prices to the cost of consumers.

The most obvious and most immediately important result of this is that it is landlords who pay business rates, not tenants. Therefore all this talk about changing rates so that tenants have their burden alleviated is nonsense.

Corporation tax though - we’re now left with capitalists (ie, shareholders) and workers. In the first instance obviously the tax impacts upon the capitalists. They’re gaining a smaller percentage of the value add, the profit. It’s what happens next that matters.

For as Adam Smith pointed out there is an average level of profit. Mathematically there must be, obviously. Capitalists chase higher than that level - except when they don’t, investing at home anyway, that one mention of “invisible hand” in Wealth of Nations - and so if, by taxation, we’ve lowered the return in one jurisdiction then more of that capital will be invested elsewhere.

The determinant of the general level of wages in an economy is the productivity of labour - that in turn determined by the amount of capital added to labour in that economy. Less capital leads to lower productivity, to lower wages across the entire economy. The workers carry some part of the burden of the corporation tax therefore. Entirely reasonable estimates for the UK economy have that worker part of the burden at 50% or so of the weight of the tax.

The only even slightly arguable point - among economists that is - in the above is that 50%. Some will argue it is lower, some, including us, possibly higher. The Nobel Laureate, Joe Stiglitz (along with Tony Atkinson) once determined that for small economies and concerning foreign investment the rate is well over 100% - the wages losses to workers are greater than the tax raised. But the general logical process there is simply standard, known and true.

It is also true that we here have a slightly different version of the Good Society to tout than many others out there. But this isn’t about what makes a free and liberal society, that desirable end goal. This is a simple and factual point and if our rulers just aren’t in accord with reality then they’re not going to rule well.

The burden of corporation tax falls first on capitalists and then on workers. Only once we get simple things like that straight will we be able to create a sensible taxation system.