It was said at my economics class that enterpreuners don't pay taxes because they put the taxes value in the price of the products. It sounds strange to me that they can just increase the price like that and mantain the same profit. Can someone elaborate on that?
This is called "tax incidence" and relies on the concept of elasitcity. If consumer demand is highly elastic, and there is a tax placed on a product, then the seller will have to pay most of the tax. If demand is highly inelastic, then the consumer (because they are not responsive to price) will bear the brunt of the tax.
You have to factor in time and action. If a capitalist makes an investment expecting certain prices and a tax is imposed on his product he will end up paying the entire tax and the consumers none of the tax (the supply must still be sold at market prices that haven't changed). However in his future investments he will factor in the tax in his marginal costs and refrain from making marginal investments that he would have made. This will raise the market price and the consumers will end up paying a part of the tax, but the capitalist also pays the tax by reducing his production and sales.
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If they add tax and raise prices and sell the same amount, price was not correct in the first place. :)
They were short on profits...
azazel: If they add tax and raise prices and sell the same amount, price was not correct in the first place. :) They were short on profits...
Not necessarily, if prices rise and quantity stays the same that just means consumer demand is inelastic. This is what happens when firms have market power.
Enterpreuner should be maximazing profits... He should sell at a point were demand becomes elastic. Otherwise he has made wrong judgment about demand. IMHO...
Elasticity has nothing to do with the optimal price. He should sell at the point where marginal revenue equals marginal cost.
azazel: Enterpreuner should be maximazing profits... He should sell at a point were demand becomes elastic. Otherwise he has made wrong judgment about demand. IMHO...
Gasoline is a product for which demand elasticity is very low. Are you saying that gas prices should be $5 and upwards?
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Juma: Elasticity has nothing to do with the optimal price. He should sell at the point where marginal revenue equals marginal cost.
If he is selling 1000 units at 100$, but can sell 1000 units at 120$, he is in error. Regardless of marginal cost.
That example doesn't work azazel, those are just two points on the demand curve they say nothiing about elasticity.
From the MES Study Guide, p.160:
C. Shifting and Incidence: A Tax on an Industry
It is a myth (in both mainstream economics and the public at large) that taxes on a firm can be “passed on” to customers. If firms could really do this—i.e., raise prices to generate extra revenues to offset a new tax—then why didn’t the firms do it before? It is true that a tax will eventually raise prices paid by consumers, but this is achieved by lowering profitability and hence supply, which then raises the equilibrium price.
D. Shifting and Incidence: A General Sales Tax
Even in the “obvious” case of a general sales tax, it is simply not true that businesses can pass on price hikes to customers. What happens instead is that the tax is shifted backward to the imputed DMVPs of the factors of production. Thus a firm reacts to a new tax not by raising its prices to customers, but by lowering its payments to factor owners.
Also on p.169-170:
A mainstream economist might defend the orthodox treatment of tax incidence (pp. 927–34) by arguing that Rothbard is overlooking the changed incentives after the imposition of a tax. For example, it is true that producers could not raise prices before the tax, because if any did so, others would undercut him. But after the tax this may no longer be true; all producers in the affected industry can raise prices because no one can operate profitably at the old price.
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alerty: It was said at my economics class that enterpreuners don't pay taxes because they put the taxes value in the price of the products. It sounds strange to me that they can just increase the price like that and mantain the same profit. Can someone elaborate on that?
I owned a bar, and even when they raised taxes (which was a pain in the a##) I always tried NOT to raise the price. When you do raise the price you pay for it by a drop in sales. It happened every time I or any other bar/ restraunt owner I know. Everytime the govt distorts the price the entrepreuner always pays something (this is more profound on smaller business). The last tax raise the govt put on my bar, plus a smoking ban (it really did hurt my business), plus the govt droping section 8 housing next to my bar (despite being voted down and petitioned against by the citizens of the neighborhood), plus my city being a major rust belt dying unionized city, plus an increase in govt regulations on alchohol, all dropped on me all within two years forced this small business owner to decide it was time to get out of business and move on to greener pastures (such as working for some govt subsidised program or public sector job).
Also consider everytime the govt raises taxes something like cigarettes which many (75% probably, and many of them working class) of my customers smoked I would get a decline in sales due to them spending more on cigarettes and less on alchohol. Trust me it is very noticable when things like this happens.
A very profitable business turned stagnet very quickly in two years to say I didn't pay for every damn action the govt made is folly to the tenth degree. Taxes and regulations can kill entrprenreurs (particularly if you are not mega rich) fairly quickly.
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krazy kaju: azazel: Enterpreuner should be maximazing profits... He should sell at a point were demand becomes elastic. Otherwise he has made wrong judgment about demand. IMHO... Gasoline is a product for which demand elasticity is very low. Are you saying that gas prices should be $5 and upwards?
You forget about supply side. The original issue was about seller finding out suddenly that he can sell at higher prices given all other things being equal. That's a mistake IMHO.
Once again I want say how asinine I think the notion that an entrepreuner doesn't pay for a tax is. Aside from the fact that they devalued my product by adding more of a tax to it (either I raise my price and lower its appeal, or I keep my price the same and lower my profit that way), any and every tax distorts the market and allocates even more money out of productive areas to unproductive areas (the government or its programs). If there is a 1% tax raise on anything that is 1% that is not going to the hands of the productive, consider it evaporated money. A tax is a devil and a half to all entrepruners and productive consumers.
The people who get effected the least by a tax, or may actually benefit fom a tax are the willingly unproductive, the subsidized, and the very rich. I will stick my neck out there and say that is no coincidence those groups tend to lean the most to the left.
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