Same subject — can companies really pass on the costs of a tax increase to consumers? Do they pass on the benefits of a subsidy?
Here’s more bogosity from Sen. John Kyl of Arizona, regarding this week’s defeated attempt to tax big oil to fund renewables research:
“When you put a tax on a business it gets passed on to consumers,” argued Sen. John Kyl, R-Ariz. “Instead of reducing gasoline prices, this bill is going to add to the cost of gasoline.”
I’d like to ask Sen. Kyl how much the oil companies decided to lower their prices after being given “exploration subsidies” in the 2005 energy bill boondoggle. Before Katrina. Remember that? How gas prices went down? And now we’ve got so much gas, heck, it’s back to $1.50 a gallon. Right?
Please share widely!
with constrained supply and growing demand, like energy, you get to choose to some extent who you pay.
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Either your local tax base, or a global energy cartel.
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In the long run, we’re not going to increase the supply of petrochemicals. We can speed up the rate of extraction by encouraging more short term investment, but in the long run, that exerts negative feedback on supply and positive feedback on both demand and price. And at any rate, whatever subsidies we provide to local petro exploration simply goes to the bottom line of those exploration companies, because the benefits go to the global supply, with small local benefits.
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Better simply to bite the bullet and accept modestly higher current prices, and position your nation for the next big thing in energy, in particular, in efficiency.
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We’ve already essentially lost our auto industry’s international competitiveness primarily because other nations have been applying higher carbon taxes than the US. With the same dynamic, we’ve encourged inefficient sprawl relative to other nations.
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Q: Who’s going to be better positioned if global energy demand grows by 50% while supply only grows by 40%, and the imbalance is resolved with price?
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A: The nations that have had higher energy taxes all along.
Companies looking to profit are obviously going to pocket as much of a government subsidy as possible. If one oil company decides to pass on some of the savings at the pump, its competitors across the street will do the exact same thing. But because of inelasticity and oligopolies – which you fail to discuss here just as you failed to discuss it in your previous posting about the telecom tax exemption – the incentive to really ratchet up these savings simply doesn’t exist. What are people going to do – protest oil companies’ greed by driving less?
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Similarly, a profit-motivated firm can, yes, “really pass on the costs of a tax increase to consumers.” Especially one that operates in a market like oil and gas. But see my comment to your previous posting about inelasticity and tax incidence.
My point is that they pass it on if and only if they can under the current market conditions. “Consumers decide” — you’re right, they don’t always have the luxury of deciding.
I don’t understand why support for ending the tax break must be solicited with assurances that households won’t be affected by higher prices. Aside from the fact that it might not be true, it also represents an appeal to the consumer rather than to the citizen.
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Wouldn’t it better – and more in keeping with the “civic engagement” theme of the Patrick campaign and this website – to be honest with people, telling them that yes, your bill might be higher, but it will help pay for libraries, schools and other public goods?
but there’s no evidence, either economical or practical to suggest that it will move because of the tax.
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Absolutely none. If you decide to go fishing today, it might rain. Correlation does not imply causality, and there’s no causality between telco pole property taxes and the rates the market will bear on their services.
Actually very broad.
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The tax increase will affect all telephone companies in Massachusetts.
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You just said that the tax increase will not have an effect on the rates, because, I assume, you figure that demand determines the price of a produce, not the cost.
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It’s pretty good economics that a tax on the production of a good shifts the supply curve to the left which in turn, all other things being equal, will increase market price. It’s common sense too.
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Let’s take a bizarre example, the government raises the tax on pole by $100,000 per pole. As a result, the telephone company will be compelled to either i) increase the price to consumers or, if the price increase fails, then it will decrease its pole holdings. i.e. it will decrease its delivery of the good which will create higher demand borne from lower supply which will increase the price. Either way, the price would increase.
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Cigarettes? Gasoline? How many examples should I list? Tax goes up; price goes up barring a substitute produce. A substitute to pole delivered telephone service? It’s not here in the short run.
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The pole tax will come from i) consumers ii) employees iii) shareholders. There’s no fourth source.
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You might argue that the tax on poles is too small to affect the price, but you didn’t say that. I’d buy that argument.
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It’s true that a tax will shift the supply curve if the tax is a variable cost: such as a percentage tax on the product or a per-unit tax.
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But, this is a tax on fixed cost. Fixed costs have no influence on price because they’re sunk. Marginal cost and marginal demand determine the price, and a tax on the POTS’ infrastructure — of which they’ll pay exactly the same if they route 1 call or 1 billion — is not a marginal cost.
If the government raised the tax $100,000 per pole, the telephone company could not raise the prices to make up the difference — they’d lose 100% of their customers to mobile phones, VoIP, etc. Demand is (relatively) inelastic, but competition prevents prices above the market for telephony, not for POTS.
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The tax will come from the shareholders [worldwide] because this will come from profits, not from rates [competitive marketplace prevents it] and not from labor [competitive marketplace prevents it]. If the POTS could have been charging more for the phone service, they already would be. If the POTS could be paying their employees less, they already would be.
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How then can you explain that when a gas tax or cigarette tax is passed, the price always rises. Immediately.
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Or how do you explain the political idea that we should raise taxes on carbon-fuels to decrease demand? The idea is flawed because “there’s no causality between [cigarette, fuels] taxes and the rates the market will bear on their services.
Because gas taxes and cigarette taxes are marginal taxes. Each additional gallon of gas or pack of cigarettes sold results in an additional tax payment.
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Marginal.
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Telephone poles don’t work that way. The telco doesn’t pay an additional fee per call made, or even per additional customer. Essentially, the extra tax is a flat fee — a sunk cost. As such, it has no bearing on the supply curve.
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Sunk.
Essentially, they’re not related. A carbon tax — like a gas tax or a cigarette tax — would work because it taxes marginally… the more you consume, the more you pay. The telephone pole property tax doesn’t really work that way… neither more telephone calls placed nor more customers [within already established pole setups] will result in the company paying more tax. The tax is a sunk cost, and therefore not in the marginal supply cost… and hence not in the curve.
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Tax on telephone pole equal more tax. More tax, higher cost, less supply and/or less demand. Tax on cigarettes equal more tax. More tax, higher cost less supply and/or demand.
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This ‘sunk’ versus ‘marginal’ comes right out of thin air. Just because it’s a ‘fixed’ cost doesn’t mean it doesn’t affect price. It just means the tax cost (and BTW, poles are not entirely fixed costs; they vary as the product expands to new places) is less per unit as the number of units increase. Unit cost still increases.
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Give this one up. Stick with the argument that the tax increase is too small to significantly matter. Because at some point, enough tax on poles, lines, wires will affect the price. Tax is just another cost. Raise the cost on all like producers and the price must increase, unless there’s a substitute. Right now, in the short run, there is no substitute: VOIP and cell phones won’t replace plain old telephone in the near future.
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-Higher tax on cigarettes, fixed or variable, causes prices to rise.
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-Higher tax on gas, fixed or variable, causes prices to rise.
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-Higher tax on telephone, fixed or variable, according to you is magically different.
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No, it comes out of a degree in economics. Read up.
sunk cost
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It’s really straightforward. Econ 201 or so.
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I’ll stop having the conversation with you, because you refuse to think about this in terms of economics. As far as I can tell, tax on telephone poles is not a tax on the marginal, and therefore will not impact price because it’s not a part of the marginal cost. It’s fixed cost, and it’s sunk, and so the telco has two possibilities: (a) set the price based on where marginal cost meets marginal demand, and hope that producer surplus over time more than exceeds sunk costs, or (b) go out of business.
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I hate to play the degree game, but since I have a Masters in economics plus an MBA, and CPA license to boot, your arrogant condescension notwithstanding, I understand sunk costs, and not just from the ivory towers.
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Costs 101, just for you.
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-The pole tax is not a sunk cost. It is an ongoing cost that has fixed and variable components. i.e. more poles, more tax.
-The cost of the pole in the ground is a sunk cost.
-The cost of tax on the pole in the ground is a fixed, not sunk, cost. Not sunk. Do you understand why? Because the tax
-The cost of future poles, to be put in the ground are variable costs.
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Your use of the term, sunk cost, is irrelevant and you’re stubbornly refusing to admit the obvious. Here’s the obvious. Increase in taxes on a product causes the product to increase in price.
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See, now that’s just flat wrong. If that’s econ 201, you flunked. Marginal cost. Here’s the question. Will the imposition of a pole tax cost the next user more than the previous user? Yes, as service expands, poles are put in the ground. The next pole is more expensive than the last. It’s a variable and marginal cost.
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Sunk costs. The cost of an old pole is a ‘sunk cost’. The cost of property tax on that pole is a fixed cost that occurs every year. The cost of the tax is not a sunk cost.
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An example of a sunk cost would be a one time assessment of taxes on poles. That, when paid, would be a sunk cost.
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Here’s the obvious: Raise taxes on products or raise taxes on the means to produce the products and you’ll raise prices. 101.
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…the issue is not whether the tax would be considered a sunk cost, but whether the cost of the pole would be considered a sunk cost. It is doubtful that a telco would remove a pole merely because it would be subject to property tax, or that a telco would refuse to provide a pole if it might make money off it merely because it might be subject to property tax.
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As far as I can further tell is that the issue is whether telcos should be exempt from tax on property, merely because they are telcos, whereas other utilities (electric distribution companies) might be subject to tax on similar property that they own. The distinction doesn’t make any sense. Moreover, if the telcos are leasing rights to their poles to other utilities (electric distribution, cable), it strikes me that they should be subject to property tax for that reason alone.
Sunk costs are costs already incurred. The debate is about a cost not yet incurred – because it’s a tax not yet levied. Which means it can still be built into future prices set by the telcos to recover this cost.
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Hopefully, because it is a fixed cost, it can be spread out over many telco service subscribers. But there is no reason to think that telcos will take it out of profit.
See its not us… we had to do it. Honest.
The tax increase will affect all telephone companies in Massachusetts who own or rent telephone poles. Cell phone companies? I don’t think so. VoIP? I don’t think so.
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so as to prevent parallel threads
sure as hell, some sumbich is gonna accuse me of pandering to the liberal left.
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So be it. I agree with you. Until the (are you listening, John Kerry’s family?) drivers of the Yukons and Denalis understand the inelasticity of ultimate supply, we are going to make China not look all that bad. If it takes the pain of Hydrocarbon taxes, it is worth it.
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My clients will pay my truck’s way no matter what the cost of my fuel, because they know they get a quality product they can’t get anywhere else. But the average Joe driving to work probably does NOT need a Denali. Nor does he need to drive it in a manner befitting a gas guzzler.
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Especially all the time . . .
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Best,
Chuck
EOM