The Impact of Corporate Tax Rates on Profits and Customer Costs
Will CEOs like Jeff Bezos, who support Biden's proposed 28% corporate tax rate, promise to not raise their costs and eat the additional 9% tax hike, or will they just pass it on to us, the customers? This is a question that has been debated extensively. In this article, we will explore the reasoning behind corporate tax rates and how they affect business operations and customer pricing.
Understanding Corporate Tax and Market Forces
Let's first address the misconception that companies can simply pass on increased tax costs to consumers. The reality is more complex and often misunderstood. Taxes for any company are based on profits, which are the money they have left over after paying all of their costs of selling a product. This is often referred to as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The key point here is that taxes impact the amount of profit, but not necessarily the cost of the product.
How Corporate Taxes Work
Consider a company that sells a product for $100. If they sell 100M of these in a year, their revenue is $10B. The cost of materials to produce each product is $60, leading to a total cost of $6B. The company pays its 2000 employees an average of $50,000 each year, totaling $1B. Additionally, there are other expenses such as distribution centers, advertising, and contracting companies, which amount to $1B. At this point, the company has $10B - $6B - $1B - $1B $2B left, which is considered EBITDA. This amount is what the company uses to calculate income tax.
When the tax increases, it means that the company must pay a higher percentage of the $2B in profits it has left. If the tax rate were 100%, the company would have no profit left after paying taxes. Conversely, if the company's costs alone were very high (e.g., $100/unit for a $100 product), it would have no profit to begin with and thus would owe no taxes. Corporate taxes do not generally increase the cost of the product in general, unless the company has pricing power and market dominance.
Market Forces and Pricing Strategies
Let's delve into the dynamics of pricing and market forces. Firms cannot just charge higher prices whenever they want, any more than individuals can draw higher salaries at will. In a competitive market, the price a firm can charge is determined by market forces, not by internal accounting details like tax rates.
Consider the example of Jeff Bezos. If he could simply raise prices whenever he felt like it, he would already be even richer. The reason he doesn't is because he is part of a competitive market, where prices are set by consumer demand and supply. High prices can lead to reduced sales and lower profits.
Further, if a company has pricing power due to market dominance, it would have already raised its prices to maximize profits. Higher taxes would not force a company to raise prices if there is no market demand to support higher prices. The company would simply have less profit, but this does not necessarily translate to higher prices for consumers.
The Real Impact of Higher Corporate Taxes
So, what is the real impact of higher corporate taxes on businesses and consumers? Higher corporate taxes can lead to reduced profits for businesses, but this does not always mean higher prices for consumers. Companies often find ways to manage their costs and operate efficiently even with lower profit margins.
For example, in the case of Jeff Bezos and Amazon, if the tax rate increases, Amazon might choose to absorb the cost of higher taxes or find ways to increase efficiency and operational cost savings. This could involve investing in technology and automation to reduce labor costs, or finding new revenue streams to offset the additional tax liability.
Consumers, on the other hand, might feel the impact of higher corporate taxes in different ways. While some companies might pass the additional costs to consumers, others might absorb the burden or use the additional funds for innovation and growth. Long-term, higher taxes can also lead to increased government spending and potential inflation, which could indirectly affect the cost of goods and services.
In conclusion, the impact of corporate tax rates on profits and customer costs is complex and depends on various factors, including market dynamics, competition, and the company's ability to manage costs and generate profits. While higher corporate taxes can reduce the amount of profit a company has, they do not necessarily result in higher prices for consumers. Companies have multiple strategies to manage their financial situations and ensure long-term sustainability.