An interesting corollary to Murphy’s Law here

Perhaps we should call it Murphy’s Law?

When critiquing someone’s economics, getting the economics wrong?

If taxes go up – profits taxes that is – will companies raise their prices? Psaki says that would be unfair. Well, maybe. But this is silly:

See, what Psaki doesn’t grasp here is that corporations aren’t individuals. They’re companies that are beholden to stockholders. Those stockholders are going to ask why it’s fair they make less money when they could adjust prices to minimize any impact.

The companies are capitalist bastard organisations. That means that if they’re able to raise prices then they already have. Capitalist bastards operating to maximise profits, see? We really do assume that corporates are already exploiting all of their pricing power already.

The pathway is actually that companies *can’t* increase prices to make up for the extra slice of profits that government is taking. So, returns to capital fall, less capital is put in to gain those smaller returns, less investment is done, the economy is poorer overall and thereby wages are lower and the workers worse off.

Corporate taxation falls on the workers not because the corporations are capitalist bastards but because their shareholders are.

Sigh.

10 thoughts on “An interesting corollary to Murphy’s Law here”

  1. OK, I follow that logic, but if the extra cost is an imposition on all competitors too…
    Then the market disadvantage from a price rise is countered by all the competitors also having to raise their prices.
    Except for the ones about to go bankrupt of course, those losing money can continue with the lower price. Briefly.
    Then, with fewer suppliers…

  2. @T the C: that reminds me, I was having a discussion about whether employing cheap Eastern European lorry drivers had increased profits for British hauliers. My first stab was to say that to first order, no it hadn’t, because the savings would accrue to all hauliers and the advantage would therefore be competed away. My second stab was to say that there is, however, a second effect that reflects on the possibility under EU rules of foreign hauliers – who by assumption employ cheap EE drivers – competing in the UK market. They would undercut UK hauliers unless the latter were also to employ cheap EE drivers. To that extent the British hauliers were protecting their profits by employing the cheaper drivers.

    Are those good points or am I overlooking larger, more important effects?

    P.S. I can’t follow the arguments of the Quislings on this issue. They seem to argue that letting EE drivers immigrate freely to the UK didn’t reduce the earnings of UK drivers. By what miracle might that be true?

  3. Standard Marxist economics: increase the size of the pool of labour, labour is competing within itself for jobs; decrease the size of the pool of labour, employers are competing amongst themselves for workers.

    In either case if a cartel forms – on either side – the first to break the cartel wins.

    Increase the pool of labour so it include people paying £500 a month mortgage in Barnsley and people paying £100 a month in Proznijkl, offer £300 a month and you’ll have people queuing up to be rolling in money. But none of them will be from Barnsley.

  4. Or:
    If they could currently get away with paying their workers less, then they would. But they can’t because they might move to another employer or even another region or country where there are better opportunities.
    Increase the Corporate Tax rate, and stick in a worldwide minimum rate to boot, then you probably could get away with paying your workers less.
    So some of the incidence is on the workers.

  5. This isn’t my area, but…
    AFAIK fuel delivery requires additional certification and is a domestic route not cross border, so was less affected by foreign truckers driving down wages.
    But there was probably some spillover suppressing wages. How much? IDK
    Fuel retailers could be making out like bandits at the moment. If they were allowed to, the fuel shortage would vanish in a day and the market for jerry cans would collapse.

  6. There is no such thing as “price gouging”. The individual who supplies goods in times of crisis should earn an outsize profit for taking extraordinary risks. There is always a market clearing price. I believe our host was booted off of Forbes for making just such an argument.

    The problem of controlled prices is that it opens up the door for corruption. Who decides who gets whatever is in short supply? We had gasoline shortages here in the US until Reagan decontrolled prices. Suddenly, no more lines. Prices rose in the short term, but dropped significantly in the long run.

  7. When a business has a monopoly it is assumed his prices are at maximum as higher ones would reduce sales & profits – Laffer curve thingy.

    Otherwise, prices are controlled by competition & if the entire industry has seen taxes reduce their take, they are likely to raise prices to recover. Of course, not if they are competing against other suppliers not being taxed.

    The above is a simplification as there are many ways to skin a cat. Putting more emphasis on cost cutting, automation, etc.

  8. The biggest effect is surely the one that hasn’t been measured: the propensity of investors to invest. If the return on capital is reduced by increased taxation then investment will be redirected to other jurisdictions, causing productivity to stagnate.

    Doesn’t matter too much if you’re a physically rooted business like a supermarket or courier as the potential for international competition is minimal. If you sell internationally or domestic customers can go to foreign competition, you’re more likely to be in trouble in the longer term.

  9. Yes, generally prices will go up. Suppose a business is gets a 5% rate of return on capital selling at a specific price. If the owners were willing to get only 4%, they could reduce their prices and gain market share. The fact that they maintain their prices means that they are not willing to do business at 4%. If taxation reduces their return to 4%, then they’ll either increase prices until they are again getting 5%, or cease trading (whether by selling the business or liquidating it).

    In the real world, things get much more complicated. Sellers are rarely perfect substitutes for one another (sometimes merely because of nebulous factors such as brand loyalty), and buyers often consider an increase in price to be worse than if the item has already had the higher price, so price rises may need to be presented appropriately. An increase in taxes is relatively easy to present as something outside the seller’s control, so it’s a good excuse to raise prices.

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