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April 17, 2010

Tax Tricks - Do Corporations Pass Taxes On To Customers?

-- by Dave Johnson

Here is a tax trick you hear all the time: we shouldn't tax corporations because they just "pass the taxes along to customers." Go to any of the usual anti-tax, anti-government sites and you'll see them trying to trick people with this.

First of all, if companies really did "pass taxes along to consumers," so what? Is that a reason not to pay for the roads, bridges, schools, courts etc., that enable the company to be profitable enough to pay taxes? But actually they don't -- because they can't.

This tax trick is based on a popular assumption that businesses can just raise prices whenever they want to. But a well-run business is already charging what they should charge for their product or service. If they have room to raise prices they should already have done so. But of course doing so this will cause them to lose sales to competitors.

Taxes are on profits, and profits are calculated at the end of a tax year by adding up all the revenue and subtracting all the costs. When a product or service is sold the company doesn't really know yet how much profit, if any, it will have at the end of the year, so it doesn't know what the tax will be, so how can it adjust prices? But if a company was able to just raise prices based on anticipation of profits, then the result would be that profits would be higher because of the higher price charged, which means taxes would be even higher, so the company should have raised prices even more, but that means the profit would be even higher, so they have to go back and charge more, but then ... I think you are starting to see how silly this idea of raising prices to cover taxes can get.

About those competitors - if one company is doing well and therefore making a profit, and another company is not doing so well, and therefore not making as much profit, and the first company raises prices to cover the taxes on the profit, then the second company has a price advantage so the first company loses sales and isn't going to have a profit after all so they really should put the prices back down, but then the other company's price advantage goes away and they are making a profit again so they should raise prices but ... Hey, this just gets silly, too!

Companies do not pass on taxes to their customers. So don't fall for this tax trick, it's just silly.

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF. Sign up here for the CAF daily summary.

Posted by Dave Johnson at April 17, 2010 1:05 PM


Comments

More likely than "passing the tax onto the customer", you'll see the company absorb the loss of profit by passing it onto the employees.

They'll require a more productive workforce to accept less while doing more...and probably resort to outsourcing, "right sizing", and concessions for those employees still involved in unions.

So your tax increase will, in the end, hurt the public just as much as if they passed it onto the customer.

There is only so much pie. No matter how you slice it, someone loses a small piece (and it won't be the management/bigwhigs who run/own the place).

Posted by: Gonk [TypeKey Profile Page] at June 4, 2010 5:01 PM

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