Corporate Taxes are Passed On to Consumers

[Apoi_Viitor]

I've encountered this argument a lot... It's basically: "If you increase corporate taxes, business will respond to that by raising the cost of goods, thus passing the tax onto consumers."

What is a sufficient rebuttal to this?

[Thirsty Crow]

I've encountered this argument a lot... It's basically: "If you increase corporate taxes, business will respond to that by raising the cost of goods, thus passing the tax onto consumers."

What is a sufficient rebuttal to this?

Well, it is a logical assumption. The sufficient rebuttal would be that we don 't need profit driven companies to consume what we need. Indeed, in this case it is not the fault of the legislator, but rather of the capitalist(s) who is/are content with raising the price and thus retaining the level of profit prior to new taxation.

[Sir Comradical]

No because business tax by definition is NOT an operating cost. Therefore no rational profit maximising business that sets prices at the point where marginal revenue (MR) = marginal cost (MC), will EVER pass higher taxes onto consumers. Why? Because if demand remains constant, capitalists would have no incentive to raise prices because if they did, MR will not equal MC and profits will not be maximised.

Now you know what the best brains of the bourgeoisie are like.

[Redliberation]

No because business tax by definition is NOT an operating cost. Therefore no rational profit maximising business that sets prices at the point where marginal revenue (MR) = marginal cost (MC), will EVER pass higher taxes onto consumers. Why? Because if demand remains constant, capitalists would have no incentive to raise prices because if they did, MR will not equal MC and profits will not be maximised.

Now you know what the best brains of the bourgeoisie are like.

Right direction, but that's not always true and depends on the tax you want to introduce as it may change the marginal revenue.

Also MR=MC is only true for monopolies.

[Revolution starts with U]

There's your answer for whithin both a socialist and a capitalist system, respectively. :D

[Sir Comradical]

There's your answer for whithin both a socialist and a capitalist system, respectively. :D
Nothing like beating rightists at their own fucking game.

[Sir Comradical]

Right direction, but that's not always true and depends on the tax you want to introduce as it may change the marginal revenue.

Also MR=MC is only true for monopolies.

Can you tell me cases where it wouldn't be true? The tax I'm referring to is business tax not VAT.

[ʇsıɥɔɹɐuɐ ıɯɐbıɹo]

I've encountered this argument a lot... It's basically: "If you increase corporate taxes, business will respond to that by raising the cost of goods, thus passing the tax onto consumers."

What is a sufficient rebuttal to this?

None, raising the cost of business raises the cost of what you sell, maintaining a profit is like maintaining a boat; if you don't want to sink, maintain your boat, and if you don't want to go bankrupt, maintain your profit. Some companies get by with slim profits and others have large profits but the idea is the same. Profits are needed to prove your business survives in an open market. Taxes are just another cost, just like paying extortion rackets to the mob it has to be done to maintain a "legal" unmolested business.

[Demogorgon]

No because business tax by definition is NOT an operating cost. Therefore no rational profit maximising business that sets prices at the point where marginal revenue (MR) = marginal cost (MC), will EVER pass higher taxes onto consumers. Why? Because if demand remains constant, capitalists would have no incentive to raise prices because if they did, MR will not equal MC and profits will not be maximised.

Now you know what the best brains of the bourgeoisie are like.
Yes, in short, corporation tax does not affect operating costs and rather takes a slice of profit at the end of the process. A business faced with this is hardly likely to choose to further reduce its profits. In the case of a firm with price setting power (most of them, but don't let right wing economists hear you saying that) they will already have set a price where marginal revenue equals marginal cost. In more competitive cases, firms are presumably selling at the price they have to as any attempt to raise it would mean people would simply go elsewhere. Again any tax that did not affect costs should not have any effect there.

The only time where a corporation tax might lead to a rise in prices would be in a very competitive market where the tax was eating into normal profits rather than just supernormal profits. In that instance it would be forcing up cost, but such markets aren't very common to say the least and moreover most tax systems don't target firms like that very heavily.

[Redliberation]

Can you tell me cases where it wouldn't be true? The tax I'm referring to is business tax not VAT.

Well, your business tax will obviously rise if a company makes more profit? That way it affects the marginal revenue too.

But what is far more important is that MR=MC is only true for monopolies. In practice you will be nearer to average costs = average revenue which is a competitive market in theory.

However if the corporations pass the taxes on to the consumer their demand will be lower which will cause them to lower the price again - that way not the total business tax will be paid by the consumer.

[Demogorgon]

Well, your business tax will obviously rise if a company makes more profit? That way it affects the marginal revenue too.

But what is far more important is that MR=MC is only true for monopolies. In practice you will be nearer to average costs = average revenue which is a competitive market in theory.

However if the corporations pass the taxes on to the consumer their demand will be lower which will cause them to lower the price again - that way not the total business tax will be paid by the consumer.
I think you have made a small mistake here, MR=MC is the profit maximising point as you know, but you are saying it is only true for monopolies. Actually it is true in any case when there isn't perfect competition (or close to it), you don't have to go all the way to the monopoly end of the scale. Basically any firm with price setting power will set prices where marginal revenue will equal marginal cost. That means monopoly, oligopoly, most imperfect competition, monopolistic competition and so forth.

[Redliberation]

I think you have made a small mistake here, MR=MC is the profit maximising point as you know, but you are saying it is only true for monopolies. Actually it is true in any case when there isn't perfect competition (or close to it), you don't have to go all the way to the monopoly end of the scale. Basically any firm with price setting power will set prices where marginal revenue will equal marginal cost. That means monopoly, oligopoly, most imperfect competition, monopolistic competition and so forth.

Well, I have been a bit unclear. You're right when you say that MR=MC is the profit maximising point for most of the markets. The problem simply is that you as a capitalist/manager do not know what your opponents do and your MR heavily depends on what they do. So in practice you won't reach MR=MC.

In this case: Will your opponents raise the price if the business tax is set higher? There is a high probability that they will at least pass parts of it to the customer.

Oh, and your MC are influenced by business tax because profit in economic terms include virtual costs which are excluded when it comes to taxes.

If revenue - total costs would make profit and this profit was taxed, then you were right if you said that all you will do is maximise the profit, regardless of taxes.

Thing is: revenue - real costs will be taxed(if that is what business taxes are about in America). You have to take into account that the good you sell at the point MC=MR before the tax introduction will not bring you any further economic profit. After introducing the tax you will lose money as the virtual costs that are included in your analysis are taxed.

EDIT: BTW, I'm for taxing the rich, tax their income, tax their assets and even more tax them when they die. I guess the results will be better.

[S.Artesian]

EDIT: BTW, I'm for taxing the rich, tax their income, tax their assets and even more tax them when they die. I guess the results will be better.

I'm for seizing their assets, abolishing their income, and helping them die penniless. The results will be much better, no guessing needed.

[Redliberation]

I'm for seizing their assets, abolishing their income, and helping them die penniless. The results will be much better, no guessing needed.

Well, I was obviously talking about what can be done in capitalism obviously ;-)

If we're not talking about capitalism the whole thread is pointless :)

[jsov]

"Will your opponents raise the price if the business tax is set higher? There is a high probability that they will at least pass parts of it to the customer."

Indeed, this does tend to be the case when discussing corporate taxes. It also tends to lead to perverse outcomes such as limited liability corporations and headquarter relocation.

Remember, corporate taxation is simply a left-liberal reformist attempt to redistribute wealth. It is a bourgeoisie solution and as Marxists we know that no matter how well intentioned, bourgeoisie attempts at "democratic" redistribution are completely futile.

[MarxSchmarx]

By the way, aren't corporate taxes how state-owned companies are supposed to return their profits for the greater good of all in places like the Soviet Union (at least in theory)? IIRC this was the mechanism used in the eastern bloc, where they had pretty much all the limiting cases a capitalist economist invokes - monopolies, very good information, prices that didn't fluctuate, etc...

[Sir Comradical]

Well, your business tax will obviously rise if a company makes more profit? That way it affects the marginal revenue too.

But what is far more important is that MR=MC is only true for monopolies. In practice you will be nearer to average costs = average revenue which is a competitive market in theory.

However if the corporations pass the taxes on to the consumer their demand will be lower which will cause them to lower the price again - that way not the total business tax will be paid by the consumer.

Well it's true for any firm that doesn't operate under perfect competition, which is like 99% of all corporations. The point I'm trying to make is that even price-setting monopoly firms will NOT increase prices if corporate tax is increased because their point of profit maximization will still remain at MR = MC. And of course perfectly competitive firms won't put up their prices in response to tax increases because they're price-takers, not price-makers. Of course it also depends on the elasticity of the good in question, so if a firm has monopoly control over water, it can get away with charging higher prices when faced with tax increases because the demand for water is inelastic. For my initial statement to hold, I'd have to ignore necessary utilities like water.

[Sir Comradical]

Yes, in short, corporation tax does not affect operating costs and rather takes a slice of profit at the end of the process. A business faced with this is hardly likely to choose to further reduce its profits. In the case of a firm with price setting power (most of them, but don't let right wing economists hear you saying that) they will already have set a price where marginal revenue equals marginal cost. In more competitive cases, firms are presumably selling at the price they have to as any attempt to raise it would mean people would simply go elsewhere. Again any tax that did not affect costs should not have any effect there.

The only time where a corporation tax might lead to a rise in prices would be in a very competitive market where the tax was eating into normal profits rather than just supernormal profits. In that instance it would be forcing up cost, but such markets aren't very common to say the least and moreover most tax systems don't target firms like that very heavily.

I still don't see the connection there between increased taxes and higher prices for consumers especially under perfect competitionwhere firms are price-takers, not price-makers.

[Redliberation]

I still don't see the connection there between increased taxes and higher prices for consumers especially under perfect competitionwhere firms are price-takers, not price-makers.

Because in perfect competition the price will be Average Costs = Average Revenue aka Total Costs = Revenue where 0 economic profit is made.

As I pointed out in one of my last replies, economic profit is not equal to the profits that are subject to taxes as virtual costs (opportunity costs etc.) are included in economic profit. Therefore total costs will rise (as average costs will) which will has to lead to a rising total revenue, because otherwise economic profit would be negative.


By the way, aren't corporate taxes how state-owned companies are supposed to return their profits for the greater good of all in places like the Soviet Union (at least in theory)? IIRC this was the mechanism used in the eastern bloc, where they had pretty much all the limiting cases a capitalist economist invokes - monopolies, very good information, prices that didn't fluctuate, etc...

That may be true, thing is that the primary objective of a state-run company is/should be to supply enough goods, not to make much profit. A monopoly in free market capitalism makes extra profit because it creates an artificial shortage in supplies. You therefore can't compare it to a state-owned monopolist who "just" makes profit from surplus labor. And this profit should be used to build up a socialist society anyway.

It's a good question though how it was solved technically, can anybody else answer it?


Well it's true for any firm that doesn't operate under perfect competition, which is like 99% of all corporations. The point I'm trying to make is that even price-setting monopoly firms will NOT increase prices if corporate tax is increased because their point of profit maximization will still remain at MR = MC. And of course perfectly competitive firms won't put up their prices in response to tax increases because they're price-takers, not price-makers. Of course it also depends on the elasticity of the good in question, so if a firm has monopoly control over water, it can get away with charging higher prices when faced with tax increases because the demand for water is inelastic. For my initial statement to hold, I'd have to ignore necessary utilities like water.

Please read my other statements. MC will be influenced by corporate taxes and in case of an oligopoly, monopolistic competition etc. MR=MC is very hard to reach in practice because it's up to the opponent's output decision and we are heavily into the topic game theory if a corporate tax is introduced/the rate for it is changed. As I said there is a high probability that they will all raise their prices for their common good. They are usually not out for a price war as they could open Pandora's box and see their profits fall to 0.

[Ocean Seal]

Well, here is the dichotomy.
A poor man steals, shame on him, it was not society, it is personal responsibility. We have no need to rehabilitate criminals.
A rich man raises costs for something, society made him do it. The government's taxes caused him to exploit his workers and raise taxes.
Its time for all of us to take responsibility, we no longer need the corporate giants. They are no longer productive or of use. We should get rid of the corporate giants, thus cut the waste, and pass the savings onto the workers. :cool: