Squilliam said:
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.
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Even if you assume TheRealMafoo is wrong and the companies don't move to a different country, the taxed companies do not just reduce the wages and benefits of their employees over time (typically by offering lower raises for several years), and the taxed companies do not reduce resarch and development or marketing (all of which are very likely to happen) the company in taxless land is still at an advantage ... I assume you meant to suggest that Taxman land introduced tariffs rather than an embargo:
If there is a tariff in place and no one responds in a similar (or disproportionate) fashion, in taxman land when someone buys a product from Company A or B they pay the price of the product plus the added cost of the tax, and if they buy a product from company C they pay price of the product plus the added cost of the tariff (which you already said was lower than the cost of the tax); the over-all result is that company C has an advantage inside of taxman land that is roughly equal to the difference between the cost of the tax and the cost of the tariff. Outside of taxman land, when someone buys a product from Company A or B they pay the price of the product plus the added cost of the tax, and if they buy a product from company C they pay price of the product; the over-all result is that company C has an advantage outside of taxman land that is roughly equal to the cost of the tax.
If there is a tariff in place and countries responds in a similar fashion, in taxman land nothing has changed and company C still has an advantage that is roughly equal to the difference between the tax and the tariff. Outside of taxman land, when someone buys a product from Company A or B they pay the price of the product plus the added cost of the tax and the added cost of the tariff, and if they buy a product from company C they pay price of the product; the over-all result is that company C has an advantage outside of taxman land that is roughly equal to the cost of the tax plus the cost of the tariff.
There really isn't any way you can fudge the numbers in a scenerio which results in the a company being unable to pass an increase in tax onto its customers or employees (reducing their income and resulting in lower GDP growth) or being at a competitive disadvantage to foreign companies (resulting in lower GDP growth, and potentially shocks to GDP due to capital flight).
