Its a question of elasticity. The more inelastic the demand for a product, the more a firm has the ability to pass on the tax. If the demand for the product were highly elastic, they would be unable to pass on taxes on consumers.

So for example, in a highly competitive market, firms face very elastic demand curves and are thus unable to raise price much (if at all) over marginal cost. So, they wouldn't be able to pass on the tax. The problem with, say, gas prices is that the industry isn't very competitive and local gas stations often implicitly collude to set prices. And since (in at least the short run), commuters don't usually have much choice to switch away from gasoline , the demand curve is pretty inelastic so any tax hikes can be passed on to consumers to a large degree.

I guess I only answered your first question - how can this habit be prevented? And my answer is to make industry more competitive and less oligopolistic.

As for your second question about the form of taxation, I don't know. Although I think it shouldn't make a difference in theory.

So you think, the more competitive the free market, the better we are able to effectively tax corporations.

Interesting.

Do you think taxing profit v. gross would make a difference?

Yes, a more competitive market reduces the ability of individual producers to set prices. I'm also assuming that the product is fairly homogeneous. Gasoline is a good example, mobile phones or houses are not.

Taxing revenue vs. profit won't make a difference, I don't think. Although don't quote me on that.

Competitive pricing is the best way to keep increases in prices in check. But the best solution is to stop the double dip taxation. Companies will pass their taxes on to the consumer. It's good business. It is also what VAT is all about. But if we did away with sales tax then the consumer would find a savings of 5-15% depending on where they live and the increase in the corporate taxes being passed on would be less painful.

Oh and only profit is taxed. Companies deduce all kinds of overhead from payroll to materials to property and utilities.

It's not an aweful habit it just gets them to their required rate of return for a given risk. They aren't evil, its just math - they are in it to make money.

A business is an investment like anything for the purpose of making money. The greater the risk of investing money somewhere the greater the required rate of return is for an investor to undertake that risk. When a new tax adds an expense to a business its decreasing the rate of return their investors will receive, if the decrease is significant enough the business will cease to exist because the investors will pull their money out and put it somewhere else. If you could only project a 3% ROR, nobody would undertake that kind of risk when they could move to bonds or CDs or something else virtually 100% safe from losses.

Damian -- the first two sections of this presentation explains the idea better than I can:
http://www.econ.ucdavis.edu/faculty/hoynes/EC230A/Lecture-Notes/Lec1-Tax-Incidence.pdf

Its a good summary, they keep the math simple and talk about theory and the empirical stuff.

I read part of the lecture notes you linked Frank. Didn't finish them yet, because I don't have time to right now.

"Companies will pass their taxes on to the consumer. It's good business."
That's exactly the problem. How can that be made bad business.

I sort of agree on the sales tax front. If you want a system which encourages customers to spend, tax their income, but don't tax purchasing. It makes sense to facilitate the exchange of goods and services.

What I consider to be the problem with passing tax on to the consumers, compared to say passing on increases in workers wages on to the consumers, is that (in my opinion) fundamentally, tax is not a cost.

Passing the cost of tax on to the consumers is akin to if a business received a fine or penalty from the government, bumping up the price on consumers to pay for it. It is effectively a legal form of tax evasion. They just make someone else pay their taxes.

It would be like if I went into work tomorrow and said. I'm in the max income tax bracket of 50% and you are paying me $100 000, which once the government takes their share is only $50 000, that's not enough 'profit' for me, you should really be paying me $200 000 so I get the full 100K.

It doesn't make sense, and my work, would do well to ignore me.

Yes businesses need to make a profit to continue to run for long. Which is why tax is on profit right now. You will never pay more in tax than your company makes.

Maybe the solution is a system where you get taxed based on your percent profit. If you're company is making a profit of 3-6% you pay 10% of that to the government if you are making a profit of 6-9% you pay 20% ... etc. I mean you'd have to optimize the numbers so that making 6.1% profit was still better than making 5% but maybe something like that would encourage companies not to pass the cost along to consumers.

But anything that takes away from the bottom line *is* a cost. Do you not consider the income taxes you pay to be a cost? I run my own LLC (Draugnar Productions). I am the only employee. I have to pay FICA at twice the normal rate plus SEI tax for every dollar I bill a customer. I take that into account with my rates. I want to keep $50 per hour as my "take home" (~100K per year full time) so I bill $120 per hour to account for all the taxes. They *are* a cost.

And how do you define profit? I have no incoming or outgoing product. Mine is a service industry (software development). With no employees the only way I coudl reflect cost would be to pay myself a salary instead of just keeping everything I make. The only other cost I have would maybe be advertising and every couple of years I buy a new laptop and my annual MSDN/VS Pro subscription.

I will grant you it is literally a cost. But what I meant by the "not a cost" rhetoric is that it should be treated differently from other costs. In that unlike most other costs it is a societal obligation.

Now I'm from a different country then you so most of the acronyms you are mentioning are jargon to me.

However if get companies taxed on profit, and the company employs you as a salaried employee should be an expense in my mind. Which would mean your business would only be taxed on the money you don't directly pay yourself. The money you leave in your business to invest/pay for future expenses. (Business taxes being less than income tax leaving some money in the company makes sense.) While the money you pay yourself should in my opinion only be subject to income tax.

Profit is the amount the company makes at the end of the day. And hey, if the company executives want to dodge business taxes by putting all the money into salary fine. Income tax is higher anyway.

I would also argue for a large captial tax. As in once you have over a certain amount in saved capital it started to get taxed. to encourage the rich to invest for smaller returns on investment, without hampering the ability to have a decent amount of money saved for retirement

I'm sorry damian, but your point of view makes no sense to me.

It is like trying to address a water shortage by asking how we can get all the water out of the rivers that we need for people and agriculture while still having plenty of water to keep the fish happy and have a decent amount of it make it to the ocean.

Or to paraphrase, how can we stop companies and investors from being so greedy?

Your example of a fine doesn't work well. If you have 10 companies that make a similar product and one of them is fined, they can't just pass that cost on because the other 9 companies won't be raising their prices. But if you raise taxes on all 10 companies, then all 10 will raise their prices.

If your goal is to take money from the rich and give it to the poor, taxing business doesn't seem like the way to go. Not only does it not work, it also hurts the economy that much more.

Personally I'm leaning towards wanting corporate taxes removed and instead just having a sales/consumption tax. The rich will still pay more as they spend a lot more. People who are thrifty and save won't pay as much tax, but isn't that something we want to encourage anyway?

A system like that encourages save it's true. But that isn't always a good thing. If you want to cause economic growth you was to de-insentivize saving of money and keep it flowing.

Canada's corporations right now are being thrifty and that is working almost by itself to trigger a proper recession here, despite being rated one of the more pro-business countries in the world.

Yes, but if you tax based on percent profit its not something they can pass along as easily As if they hike the prices you take more money. At least I think it would work, better than a system based on $ of profit anyway.

Yeah, greed is bad. Which is why you need to incentivize accepting a lower margin of success, by making it more profitable after tax.

A sales/consumption tax is a crazy idea if you want a fast growing economy. That said a fast growing economy might be a stupid idea anyway. I think we should be planning for a zero or low growth economy.

"If you want to cause economic growth you was to de-insentivize saving of money and keep it flowing."

This isn't necessarily true; savings is also what leads to investment and higher growth rates.

Although you're right about Canada right now.

Yes, but only when people are actually investing their saved funds. Which was the point about Canada, they aren't investing.

But yes, so long as the money keeps moving while it is being saved the economy can still grow. Its only when it's held out of circulation.

However money still does flow faster when it isn't being saved then when it is. Meaning that de-insentivizing saving will trigger growth, even if some economic growth can occur with save money

Taxes have little to do with price. For example, look at the rankings of US states by gas tax, then compare that to the list rankings of state by gas price. Alaska has the lowest gas tax, also has the second highest gas price. If you say, well that's because Alaska is far from the mainland. Ok, Illinois has one of the highest gas taxes in the country, yet it ranks somewhere in the middle in terms of gas price. Michigan is a more extreme example of high gas tax and comparatively low gas price.

And we all agreed gas is very inelastic, so if anything we should see a stronger correlation with tax & price with gas, but we don't.

Are you suggesting that companies do pay all their taxes Putin?

I think the notion that more competitive markets lead to a decline in prices is belied by the fact that deregulation of things like energy & cable have led to a large increase in prices.

Damian, the problem with your profit tax is simple to demonstrate.

Company A, B, and C all make widgest. All three make $20 profit per widget. You tax all three equally (say 20%, $4 per widget) and they will all raise prices $5 so they make $25 perwidget. This 20% tax now uses $5 bucks, so they still make $20 per widget and the consumer pays the tax. Your plan didn't work

Now let's say company A is big and sells many more widgets but has a reputation of making the best widgets. So you tax them 50%. They increase their price per widget $20 ($15 more than B or C) but the people pay it because their widgets are perceived as that much better. Still doesn't work.

Remember, with size comes reputation and a willingness of the public to pay for "the name". Do you really think Sony TVs or Apple iPhones are that much better than the competition? No, they aren't. The general populace ("fanboys" in Apple's case) just wants that name.

And when you start raising taxes,to high, you drive companies away. Canada is just a little north of Microsoft's HQ in Redmond. Push them to hard and they might roll in the moving vans and head out with everything. Canada would welcome them with open arms. Texas Instruments is based in Dallas. They might just pack up and head south to Mexico. Nissan, Honda, Toyota and Hyundai/Kia might just decide doing business by building cars in the US is altogether to expensive and close down their facilities here just importing product and paying the tariffs.

It's a global economy whether we like it or not and raising taxes in the US sends business *out* of the US.

I think there are examples of both. But yes. Often deregulation leads to oligarchic conditions, because when you get right down to it businesses is not competitive.

And that is a problem. Regulation is the answer to keeping businesses from colluding to raise prices. I think government run companies that are given some sort of motivation for efficiency would be a far better system. But that isn't what this is about.

This is about companies paying their taxes.

"Are you suggesting that companies do pay all their taxes Putin?"

I'm saying that taxes do not necessarily lead to price hikes on consumers.

Energy and cable aren't remotely competitive industries, Putin. Also, arguing for increased competition does not mean arguing for less regulation....often gov't regulation is necessary to increase competition or remove monopolies or oligopolies.

http://153.90.2.81/econ/djyoung/papers/Tax-PriceV5-1.PDF

Taxes are a very small portion of alcohol prices. 3.5% of the average price. They are a very poor predictor of alcohol price.

"Energy and cable aren't remotely competitive industries,"

How many competitors do you need to be considered competitive? In my area I have 4 cable companies not to mention dish providers. Hasn't prevented the price gouging in the least.

(I am actually Canadian, but your point stands.

The example of Canada right now is we have created a business friendly environment, one of the best in the world and businesses aren't coming anyway.The movement of business is not all about taxes)

I think you are misunderstanding my profit tax thing. To use your previous example of the widget companies. Lets say it cost them 35$ to develop the app and pay salary, and each company sold 2 copies. Their costs are 35$ their gross is 40$, profit is 5$. 5/35= 14.3% profit as a percentage of cost. Each company would then be taxed 20% of their percentage, which totals to 2.86% percentage of cost. Or $1. Net profit after tax $4

So they raise prices to 25$, gross 50$ cost 35$, profit 15$. 15/50, = 42.9% percent profit to cost. As profit % has increased the tax bracket goes up to 75% (arbitrary numbers bear with me.), is 30.89% of cost or $10.8. Net profit after tax $4.20 Meaning increasing the profit margin might actually cost you money. Once you increase your % profit to cost past a certain point.

Actually I think that's just a complicated way of saying that the tax rate increases as the ratio of cost to profit increases.

damian - "Yeah, greed is bad."

Then your understanding of the human condition is very different from mine and I'm not sure we have much of a basis for discussion. I think greed is a vital ingredient, not just for our economy but for our society.

Yep. Well the discussion is about how we can prevent corporations from dodging taxes.
So clearly greed is assumed to be an issue here.

@Putin - Really? 4 cable companies? Are you still in Columbus? Cause Generally speaking only one provider services an area and you don't have a choice of who your cable provider is. Your only chaices are satellite (several providers obviously), cable (which ever one happens to have the monopoly) or over the air TV. Please enlighten me as to the 4 cable comapnies you have so I can get with my city council and see if we can't get some options here in fairfield, where Time Warner has an exclusive lock on everything.