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One more time for the economically slow ...
Posted by: McQ on Thursday, June 21, 2007

Corporations don't pay taxes. In the Senate today:
The tax proposal that stalled today would have slapped oil and gas companies with $29 billion in new taxes to pay for alternative energy and cleaner coal projects.
Actually it would have slapped you, Mr. and Ms. Taxpayer with another hidden tax which would have shown up at the gas pump in the guise of higher prices. But it sure sounds good, doesn't it? Your hard working public servants 'slapping' oil and gas companies with new taxes.

Heh ...
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Previous Comments to this Post 

my last economics class was a long time ago, but i recall that corporate taxes can, in theory, be paid by the shareholders (tax paid by profits), or by the employees (tax paid by reduction in salaries and other costs) or by the customers (tax paid by increase in income).

but i’ll agree that most americans are shockingly economically ignorant.

Written By: Francis
URL: http://
Yes, corporate taxes can only get passed on to the consumer if the market allows it. Depending on the product and the tax, that may be almost completely or just a portion of the tax. If corporate profits are high and market competition intense, the tax may come from profits (or lower wages for workers or executives). There are, of course, economic consequences that go beyond who pays directly. But markets rarely allow just a direct passing on of taxes to the consumer.
Written By: Scott Erb

Competitiveness is a big factor in the corporate response. If a tax is industry wide there is no incentive for the company to reduce salaries or headcount- it’s easy to pass it on to customers because everyone is being hit equally. A company will take a hit on profits if it has to to remain viable, but generally speaking, managers and owners have profit targets to hit and they will do what they can to do so.

The priority is generally this: pass costs on to customers first, reduce compensation expense second (usually via layoffs or by reducing future variable pay (bonuses, raises, etc.), take a hit on profit third.

Mr. Erb, this - "markets rarely allow just a direct passing on of taxes to the consumer" is usually not true if the tax or cost is essentially industry wide.
Written By: Grimshaw
URL: http://
my last economics class was a long time ago, but i recall that corporate taxes can, in theory, be paid by the shareholders (tax paid by profits), or by the employees (tax paid by reduction in salaries and other costs) or by the customers (tax paid by increase in income).
As Grimshaw points out, there is a definite set of priorities which are used. First is the customer, second is the cost of labor and only if they have to, will they cut into the shareholder’s profit.

And as he also points out, the market has no voice in this since it is a tax imposed on the entire market, not just a segment, so there is no competitiveness concern here.

In this case, the cost of 29 billion would be easily passed on to the consumer at the pump.
Written By: McQ
I should add that companies also tend to kill new projects and initiatives before eating profits. Profits are the lifeblood of the enterprise. Lots of bad things eventually happen when a business is not profitable for extended periods of time.
Written By: Grimshaw
URL: http://
But markets rarely allow just a direct passing on of taxes to the consumer.
You have a land line phone? Ever look at the bill?
Written By: Ryan
URL: http://
Ryan, I believe those taxes are imposed directly on the consumer and the telco’s are responsible for collecting them (like a sales tax). A tax directly on a business is different. In theory the business could eat those or blend them into their price without calling them out on their customer’s bill.
Written By: Grimshaw
URL: http://
I don’t think the argument that it would raise gas prices is very convincing; post-EBITDA stuff generally doesn’t affect operational costing considerations unless they actually bankrupt the company. Much more persuasive is the notion it would hurt millions of shareholders (including pension funds) and greatly reduce oil company investment in new energy projects.
Written By: TallDave
Now a gas tax, that would raise gas prices, and would be analogous to the taxes on your phone bill.

The biggest conceptual flaws in the bill are that it robs wealth from oil company shareholders and assumes the government can spend the money better than private industry.
Written By: TallDave
my last economics class was a long time ago, but i recall that corporate taxes can, in theory, be paid by the shareholders (tax paid by profits), or by the employees (tax paid by reduction in salaries and other costs) or by the customers (tax paid by increase in income).
And my last econ class was a few months ago. I’ve only taken two semesters, but I believe the fall of the tax incidence depends on the price elasticity of demand and price elasticity of supply. If the price elasticity of demand is inelastic relative to the price elasticity of supply, the tax burden falls on the consumer. In the reverse situation, the burden is on the supplier. Because the demand for oil/gas is highly inelastic, I would guess any tax on the industry would pass largely to the consumer.
Written By: CJ
URL: http://
This is really easy to understand. If businesses don’t pass on the costs in the form of higher prices, where on earth are they going to get the funds? They can’t print it. To a business, taxes are merely another cost of doing business, and are eventually paid by consumers as are all costs of doing business.

And as far as corporate shareholders go, it’s good to remember that capital always seeks it’s highest return. Always. If the government makes it too expensive to profit relative to other available investments (including overseas investments), that capital will eventually be reallocated to a higher profit use and we’ve killed the goose that lays the golden eggs.

Written By: peter jackson
CJ is correct, fuel/energy is about as inelastic of a demand as you can get right now. This will be mostly passed on to consumers. But it will probably also hurt special projects.

Of course, it is a settled issue with me that the more money taken from the private sector and put into the public sector is a drag on the economy due to the differences in investment/efficiency/use of the funds.

But to Democrats, there is always the chance that one day we just might be able to tax ourself into prosperity.
Written By: kyleN
CJ and Kyle: Yes, that’s my read on a oil/gas tax as well.
Peter: If market conditions don’t allow passing of the tax on to the consumer (when demand is highly elastic), then the result is either reduction of profits (which could mean losses to the shareholders, fewer bonuses to executives, less investment, etc.) or cuts in wages or work force. The result would be a new equilibrium, but depending on the path there the impact on the economy would go beyond the industry taxed.

Think of the reaction of companies to the oil price shock in the late seventies. They had to raise prices (pass part of the cost on to the consumer), but since markets didn’t allow all the cost to be passed on, they also had to let go of workers and decrease supply, since the oil shock also meant less demand. The result was stagflation.
Written By: Scott Erb
All taxes are initially passed onto the consumer.

The only way they come back to haunt suppliers is if there’s a reduction in consumption. Then their profits are reduced.

And as stated before, short term, gas consumption is highly inelastic and longer term it is still very inelastic. So the producers will bear little of the effects of the tax burden.

It’s also a regressive tax. Love those tax the poor Democrats.
Written By: jpm100
URL: http://
In my business, we take opportunities like this to raise prices to cover the new costs AND to increase profit margin while blaming the new situation.

Just like when Bush imposed tariffs on steel, and suddenly steel prices soared in asia...I think it was just the sort of industry wide signal that allowed everyone to raise their prices.
Written By: Harun
URL: http://
My question is not if I’ll pay more at the pump. I know I will. But, will the increased tax really prompt the creation of practical alternate energy sources?

Many of us who realize just how important it is to defeat our enemy, have been asking what us private citizens can do to support that effort. The answer that came back: "Just be observant and report suspicious activity. Other than that, let the pros do their job." did not satisfy us. We want to do more.

If paying more for gas really does lead to practical alternate energy sources, then we’ll be able to ween ourselves off Middle Eastern oil. When the world’s largest consumer of oil decreases its consumption, will Iran and Saudi Arabia be able to fund terrorism at their current levels? Not likely. If the whole world switches to something other than oil, the Islamist dream will wither on the vine.

Last year I bought a new car. I considered a hybrid for personal economic reasons (greater fuel efficiency). I did not buy hybrid because, even though my gas bill would shrink, the cost of the car would eclipse those savings. It was a good personal, short term economic decision. But I now believe that it was also a bad, long term economic decision for the future prosperity of the United States as a whole.

I would gladly pay more IF it contributed to victory!
Written By: Doug Purdie
URL: http://
Doug Purdie,

The energy bill is a massive farm subsidy disguised as an energy bill. At best it won’t decrease our dependence on foreign oil and is likely to increase it.
Written By: TJIT
URL: http://
SCott Erb for President of the United States of Excuses (and Parasitism).
Written By: Sharpshooter
URL: http://

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