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TheRealMafoo on 23 July 2009
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Squilliam said:
HappySqurriel said:

What TheRealMafoo talks about is a well known well studied principle, but the theories about why it happens are diverse ...

Personally, I think a large portion of it is based on the fact that the people who really pay taxes are the people without the ability to pass on the costs of higher taxes to others. Basically, if you impose a 50% tax on people who have power and influence (basically, people who earn more than $100,000 per year) they will either increase the price of their products or services, or reduce payments to their employees, in order to double their income so that their standard of living doesn't change as a result of a tax increase.

Now, the difference between the government spending this money and individuals is that individuals tend to act rationally and favour the most innovative and/or efficient companies while the government is remarkably inefficient; and even if they do contract to a private company, they still end up spending far more than retail price even if they buy products in massive quantities.

Ok then: Lets say we have company A, company B and company C and they are the only 3 pencil makers in the world and there are no substitutes for pencils, everybody needs one. However all pencils are close to identical.

Company A and Company B exist in Taxmax land and Company C exists in Taxless land.

The price of pencils are $1 each.

Each company can produce enough pencils to satisfy the world demand.

If tax is doubled on company profit in Taxmax land so the profit on the pencils are reduced to almost nothing.

Company A and Company B cannot increase the price their charge for the pencils because Company C would take 100% of the worlds market for pencils if they do. So the price of the pencils remain static even though the profits have been all but completely taken by Taxmax lands government. 

Now assuming that the government of Taxmax land introduced an embargo on pencil importation to protect Company A and Company B. The price of the pencils would increase but it would not increase as much as to completely eradicate the effects of the taxation because each company would price their pencils to maximise their profits. However without collusion they could not extract the maximum profit possible because they are acting in accordance with their own best interests assuming the other player did the same. This means that they would incur at least some of the additional taxation without passing all of it along to the consumer at the end.

 

 

So you set up an example that never would happen? Funny. In your "world", what would happen, is Company A and B would move operations to wherever company C is, so they could make the most profit. Thus all the money earned by the employees now moves to Taxless land, and GDP goes down in Taxmax land.