More simple econ lessons.

Why taxing corporations doesn't really help.

We're going to use representative things here.

Widget Co makes widgets®.

For each widget®
The materials cost $1.
Labor $1.

The company wants to make 10¢ per item and since they sell a lot of them it adds up.

This is also a 5% margin.

So, they sell each widget® for $2.10 factory direct.

A distributor buys them.  They want to make a 5% margin too, but they have a $1 of cost to process and ship the item.  Cost per item is now $3.10.  To sell with a 5% margin will be $3.26.

The distributor now sells to the retailer.  They want to make the same 5% margin.  They have $1 of costs in labor and overhead; so the widget® will cost them $4.26 so the sell them for $4.47.

The customer picks up the widget® and takes it to the counter and pays $4.47 plus the 5% state sales tax and the 2% local option sales taxes for a take home price of $4.78.

That's pretty straight forward, isn't it?  In this series of transactions the state just got 31¢, the maker got 10¢, the distributor got 16¢ and the retailer got 21¢.

Again, I remind you this is a GROSS simplification.  Rounding to nearest cent.

What happens if the state decides that every time the widget® changes hands they need a 5% sales tax?

Materials still cost $1, labor still cost $1, Widget Co still charges $2.10 per item but now it costs the distributor $2.21 per item.

Labor and stuff is still $1 for the distributor so they sell at $3.37, and now the retailer pays $3.53.

Overhead is still $1 so the retailer sells to the customer for $4.76.

The customer pays $5.09 now.

In this series of transactions the maker got 10¢ (like before), the distributor got 16¢ (like before) and the retailer got 23¢ (a little more).  But the State now collects 61¢ (almost double)!  The customer gets to pay 31¢ more for the same item.  The entirety of the 30¢ increase in revenue is paid for by the consumer!

Notice that the only person who has less money than before is the customer?

Let's now presume that a widget® is something that consumers just won't pay more than $5 TOTAL for.  The only way to bring the price down is to cut taxes or cut margins.  If everyone cuts to a 4% margin, leaving state sales tax at 5% per transaction with a 2% local option the customer will pay $4.98 and the state will collect 60¢.  BUT Widget Co now only make 8¢, the distributor only gets 13¢ and the retailer gets 18¢.  Notice the state only loses a penny, the customer saves 9¢ but the businesses lost a total of 10¢.

It doesn't seem so bad at this simple level; does it?  Let's consider that a 5% margin is considered to be doing pretty damn good.  3% is far more typical and what if the price point for the item was the $4.78 the customer was paying originally.  In other words, if the price is $4.79 after taxes the customer decides "no sale"; what then?

If the state insists on collecting 5% at each point, plus an additional 2% at the register then our supply chain can only have a 2.15% margin in it.  The maker now gets 4¢ per widget®, the distributor gets 7¢ and the retailer gets 9¢.  The state is still getting 58¢ though.  This is the only situation where "sticking it to the fat cats" doesn't affect the price to the consumer.  When demand is inelastic past a certain price point then the maker has to reduce their margin or lose money.

Just for the record, in our above example if we took out all the profit and still charged $4.78 per item total the state's cut would be 78¢ and they'd be charging a 7.3% rate.  See how fast you can kill a business with just a "small" increase in taxes?

This is how it works, kids.  It's not complicated math at all.

Just as a side note, if the companies in question decided that the 2.15% margin was more than enough with the state only collecting taxes at the cash register then the price at the counter would be just $4.49 with the state still getting 29¢.

A counter example.  I've talked about inelastic demand above a certain point.  What if demand doubled at $4.53?  With a 2.5% margin and a 7% sales tax at the counter, total revenue will be more because there are twice as many sales with 30¢ per item (60¢ vs 58¢)!  Profits, in dollars will now be the same as the original example and the customer will save 25¢ per item.

PS: that simple math is a proof of the Laugher Curve.  Voodoo indeed.