The Incidence Tax


One of the many national points in the current election is whether the Democrats will allow the Bush tax cuts to expire. President Obama has stated that he is perfectly willing to allow the Bush tax cuts to remain on the middle class, on those earning less than $250k, and on the lower 95%. Obama wants the tax cuts to expire for the upper 5% and for corporations.

The dirty, little secret in this class warfare tactic is that you usually end up getting taxed in the end anyway. The primary reason a corporation is founded is to make money. If the corporation ceases to make money, that corporation will cease to exist. The reason a CEO is hired is to make his corporation money (see profit), and the reason that the CEO’s hierarchy beneath him is hired is to help the CEO make a profit. If they fail to make a profit, they are fired. As a result, when these evil corporations are taxed by wonderful Democrats, the CEO and his hierarchy are forced to scramble to find a solution that will allow them to keep their jobs and keep their corporation in business. A survivor’s instinct kicks in. The first, most common solution for them is to raise the price on the products they sell you. In other words, they pass the taxes imposed on them onto the consumer that buys their products. In economic circles this is called an Incidence Tax. You are “incidentally” taxed every time you purchase a product from a corporation.

This is perfect for the populist politician, for he is able to continue his class warfare by telling you that the corporation charges you too much for their products for what he calls “fat cat” profits. In reality, the corporation hasn’t increased their profits by one thin dime. The populist politician then says that the fat cats need to be gotten even with for daring to increase the price of their product. There have even been politicians that have forbidden corporations to increase their price.

There is little in the way of political consequence for the politician, for you will blame the corporation, and you will hate the corporation for being greedy, when in essence the corporation is merely acting as a tax vehicle in this chain, and the politician that gets away unscathed. You, however, are still taxed in an incidental manner.

So, if a corporation is demonized for raising their prices due to imposed taxes, they are required to find alternatives. Public relations are a huge portion of a corporation’s existence, and they must do whatever they can to prevent being singled out by Democrats. Do they lay off a percentage of their work force? This will result in negative reports in the media. Do they ship manufacturing overseas? Democrats have been able to demonize any corporation that seeks this alternative, even when they take advantage of it as Senator John Kerry did with the building of his seven million dollar yacht. Do they lower the dividend rate received by their individual investors? Do they enact a hiring freeze?

In the end, and in the competitive world, a corporation won’t, and cannot, arbitrarily raise the price of their products any more than the market will allow to incorporate the new taxes into their bottom line. Corporations face one thing the government does not: competition. If the competition does not raise their prices to recoup the cost of a new tax, then a corporation cannot raise their prices either. No matter how various corporations decide to recoup the tax that was imposed on them, they won’t have any more money than they did before the tax was enacted, but the government will. You won’t have any more money either, but the government will. It’s called an Incidence Tax.

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