which is what is left over after labor and suppliers have been paid plus the costs involved in manufacturing whatever it is. Those are what go into pricing any item or any service.

Raise taxes on net profit, try to increase the price of the item to offset the taxes, the taxes just go up again. People who say taxes on net profit will make goods and services more expensive don't know the difference between gross and net profits.

When taxes go up, net profit goes down. Companies often have goal in terms of net profit they want to hit, and when taxes go up, they will often try to raise prices or cut expenses to make up the loss in net profit.


I think you are wrong when you say "Raise taxes on net profit, try to increase the price of the item to offset the taxes, the taxes just go up again. People who say taxes on net profit will make goods and services more expensive don't know the difference between gross and net profits."

Thats a bit like saying there is no point in me asking for a pay raise, since my income taxes will just go up. A business is no different. If you raise taxes, they will try to raise the price on merchandise to keep the net profit the same (if the market will allow a price increase). Sure they pay more taxes, but they still make more money compared to leaving the price the same. If I ask my boss for a pay raise, my gross income (gross profit) goes up, and so does my taxes, but my net income (net profit) also increases.


Its important to note that raising taxes generally affects all businesses equally. So if coke and pepsi are competing, and corporate taxes are raised, both companies have new expenses, and both will likely increase the cost (assuming the market will allow it). This is different than a scenario where just one company faces increased cost, where they usually have to eat the cost, because if only they raise the price they will be less competitive.

However, if taxes are reflected in the price of finished goods and services, the taxes just go up.

Get it yet?

Next time your boss offers you a pay raise, I want you to tell him "no thanks, my taxes will just go up if I increase my salary".

Obviously that is absurd, and you will gladly take the raise, and gladly pay a bit more in taxes. Its no different than a company. If they can get away with raising their prices, they will, and even though it increases their Net before tax, they will still do so.

One of the most important numbers for a major company is Earnings per share which is (Net income-Dividends on preferred stock)/Average outstanding shares. If you increase taxes, their net income goes down, as does the EPS, and they will do everything they possibly can to get it back up.

Now I suppose you could be cynical and say that a company is going to do everything they can already to increase their net profit, and you would probably be right, but when a new expense comes along that affects everybody in the industry, then often all companies will increase their price at the same time to reflect the new expense.

First, that a company wants to hit a certain amount of net profit regardless. As i understand it this is profit above and beyond the cost of producing the good, including all salaries and direct compensation.

> Companies often have goal in terms of net profit they want to hit

So let's say they can't hit this target with a new set of production costs or taxes. Will they automatically change their price point to make up the difference?

> they will try to raise the price on merchandise to keep the net profit the same (if the market will allow a price increase) (emphasis mine)

And this is the second idea i wanted to look at: in a competitive market, raising prices will reduce demand and reduce market share unless it happens across the board. However, a smaller shift in price combined with some other compensating factors, e.g. improved efficiency or reduced profit expectation, might be pareto optimal. If all competitors are hit with the same cost increase, the company that finds a way to not shift the entire difference into a change in per-unit price could find itself with a significant advantage.

It seems to me that the less competitive the market, the less incentive there would be to make any change other than a price increase -- keeping in mind that even a monopoly can lose out by pushing its price past what people are willing to pay.

So maybe what I'm looking for is some metric of price stability, which indicates how much of an increase in fixed costs will be absorbed internally.

So maybe what I'm looking for is some metric of price stability, which indicates how much of an increase in fixed costs will be absorbed internally.

Look up Tax incidence. It is the economic theory that determines who actually pays the tax (not necessary who collects the tax.)

Tax incidence is based on price elasticity of demand (another economic theory). So lets imagine a product that is perfectly inelastic. So demand does not change regardless of price. If I am in the middle of a desert selling water, and if somebody comes across my shop and will die if he doesn't get any water, then he will pay whatever price I'm asking, even if it means emptying his wallet. In that case, the tax incidence would fall 100% on the consumer, and the business would absorb 0% of the new cost imposed.

Almost nothing is 100% inelastic, or 100% elastic, The percent of a new cost adsorbed by the consumer, and the percent absorbed by the seller is based on the actual price elastic demand curve, and there is a formula if you want to look it up, but tax incidence theory would state that the burden of a new tax is adsorbed by both parties in most cases.

Of course these are just theories. No business can run numbers in excel and determine where they are on the price elasticity of demand curve, they just try to raise their prices, and see if they can at least keep enough customers to make more money.

vs. say raw materials. in a labor heavy product, a lot. in a material heavy product, less.

if you want to give an example I could probably find a unit price breakdown for you.

I think it applies equally to raw materials, equipment costs, whatever. One could generalize the question thusly: To what extent is variation in the cost of production and net profit reflected in the price of the end product?

It seems to me this would be related closely to competitive market stability and the ability of a producer to absorb changes in fixed costs and net earnings, and it's not an automatic "consumer always gets hit with the difference" situation.