Heritage Chartbook

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dshields's picture
dshields
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Heritage Chartbook

About once a year I post a link to the Heritage Chartbook.  I know Heritage is right leaning.  They sometimes take positions that I do not agree with like their position on free trade agreements (they love them).  However, occationally it is good to just take a good look at some data like the tax data, or government spending data, or entitlements data and lean back in your chair and ponder...

http://www.heritage.org/BudgetChartBook/

 

land2341's picture
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 Figures don't lie,  liars

 Figures don't lie,  liars figure.

 

Heritage's statistics are often so skewed as to be useless.  Just the fac tthat they call social security programs "entitlements" torques the entire conversation one way.

darbikrash's picture
darbikrash
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Odd, it seems Heritage has

Odd, it seems Heritage has missed a couple of CBO charts. An oversight I’m sure.

and...

dshields's picture
dshields
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fed gov
land2341 wrote:

 Figures don't lie,  liars figure.

 

Heritage's statistics are often so skewed as to be useless.  Just the fac tthat they call social security programs "entitlements" torques the entire conversation one way.

SS is an entitlement - isn't it ?  The fed gov takes your money by the force of law from you your entire life under the agreement that you will receive a calculated benefit when you reach a certain age and/or other conditions.  So you are entitled to your benefits - you paid for them.  I only wish there had been a way for me to have put that money and the company matching part of that money into a simple savings account or market fund my entire life.  I did some crude calcs on that and I would be able to retire pretty good.  As it is I may not be able to because the fed gov spent the money and now they may well not be able to pay me based on the agreement.  If it was a private company I could sue them for fraud or breach of contract.  Since it is the fed gov I can not.

 

dshields's picture
dshields
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yep
darbikrash wrote:

Odd, it seems Heritage has missed a couple of CBO charts. An oversight I’m sure.

and...

yep - I did not claim it was going to be beautiful - just interesting.  I know we have had this conversation before, but in general corproate taxes are a pass through.  They just raise the prices of the goods or services to pay it.  It id different as compared to your personal taxes where the government(s) take the money under the force of law from your pay.  You do not have a way to compensate for this.  Corporations generally do so they do.

 

darbikrash's picture
darbikrash
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dshields wrote:  I know we
dshields wrote:

 I know we have had this conversation before, but in general corproate taxes are a pass through.  They just raise the prices of the goods or services to pay it.  It id different as compared to your personal taxes where the government(s) take the money under the force of law from your pay.  You do not have a way to compensate for this.  Corporations generally do so they do.

No.

Corporate taxes are not a pass through. This is a common trope advanced by conservatives to justify lowering (or removing altogether) corporate taxation. In a flat or declining wage environment we have a pretty straightforward concept called price inelasticity. The producer has already effectively adjusted pricing to reflect the maximum the market will bear. If wages are flat, and a cost increase comes along, the producer will bear the cost, not the consumer. We saw clear evidence of this effect of this during the Luxury Tax of the ‘90s’- a complete failure in which demand dropped precipitously when the 10% tax was applied- and applied to the demographic group (supposedly) least affected by price- those buying luxury goods.

For an even more interesting chart (again not to be seen in Heritage reports) is the relationship between corporate tax as a function of GDP overlaid with personal tax as a function of GDP. You can clearly see the redistribution of taxation from corporations to individuals over a period of 40- 50 years- an observation that Heritage would very much not like you to make.

Example of tax incidence

Imagine a $1 tax on every barrel of apples an apple farmer produces. If the product (apples) is price inelastic to the consumer (whereby if price rose, a small demand loss would be accounted for by the extra revenue), the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1. In this example, consumers bear the entire burden of the tax; the tax incidence falls on consumers. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic (if prices rose, more demand would be lost than extra revenue gained), the farmer has to bear the burden of the tax or face decreased revenues: the tax incidence falls on the farmer.

Where the tax incidence falls depends (in the short run) on the price elasticity of demand and price elasticity of supply. Tax incidence falls mostly upon the group that responds least to price (the group that has the most inelastic price-quantity curve). If the demand curve is inelastic relative to the supply curve the tax will be disproportionately borne by the buyer rather than the seller. If the demand curve is elastic relative to the supply curve, the tax will be born disproportionately by the seller.

 

And:

 

Inelastic supply, elastic demand

Inelastic supply, elastic demand: the burden is on producers.

Because the producer is inelastic, he will produce the same quantity no matter what the price. Because the consumer is elastic, the consumer is very sensitive to price. A small increase in price leads to a large drop in the quantity demanded. The imposition of the tax causes the market price to increase from P without tax to P with tax and the quantity demanded to fall from Q without tax to Q with tax. Because the consumer is elastic, the quantity change is significant. Because the producer is inelastic, the price doesn't change much. The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer. In this example, the tax is collected from the producer and the producer bears the tax burden. This is known as back shifting.

 

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But in the long run....
darbikrash wrote:

 

Inelastic supply, elastic demand

Inelastic supply, elastic demand: the burden is on producers.

Because the producer is inelastic, he will produce the same quantity no matter what the price. Because the consumer is elastic, the consumer is very sensitive to price. A small increase in price leads to a large drop in the quantity demanded. The imposition of the tax causes the market price to increase from P without tax to P with tax and the quantity demanded to fall from Q without tax to Q with tax. Because the consumer is elastic, the quantity change is significant. Because the producer is inelastic, the price doesn't change much. The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer. In this example, the tax is collected from the producer and the producer bears the tax burden. This is known as back shifting.

 

You qualified your original statement with a "( in the short run )" but what about the longer run?

Using your example of an apple farmer, of course he may be forced to eat the new tax.  He is selling a perishable item and made all his business decisions ( how big of farm to buy, how many trees to plant, cost of input per unit, ...) based upon a set of assumptions that are no longer correct.  He is going to have to eat those costs for now but do you really believe that over time this is not going to change his and his competitors behavior?  Will he plant as many trees going forward?  Will new entrants into this business buy as big of farms?   Will some existing businesses choose to leave the market because they no longer feel the profit justifies the risk?

I will bet that over time an equilibrium is met that is far closer to dshields pass it on to the custormer, than your inelastic supply cost eaten by the producer.

darbikrash's picture
darbikrash
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goes211 wrote: You qualified
goes211 wrote:

You qualified your original statement with a "( in the short run )" but what about the longer run?

Using your example of an apple farmer, of course he may be forced to eat the new tax.  He is selling a perishable item and made all his business decisions ( how big of farm to buy, how many trees to plant, cost of input per unit, ...) based upon a set of assumptions that are no longer correct.  He is going to have to eat those costs for now but do you really believe that over time this is not going to change his and his competitors behavior?  Will he plant as many trees going forward?  Will new entrants into this business buy as big of farms?   Will some existing businesses choose to leave the market because they no longer feel the profit justifies the risk?

I will bet that over time an equilibrium is met that is far closer to dshields pass it on to the custormer, than your inelastic supply cost eaten by the producer.

I’m impressed. An acknowledgement that the producer will eat the tax. And I must say, I think every one of your questions and hypotheticals (in my view) are correct. Yes, the means (and scale) of production will tend downward to support a reduced market size. And yes, others will leave the business entirely because they determine the margin no longer supports the investment.

But the most important part of my original post is the part that says that we refer to a “flat or declining wage environment”.  Because the cost to produce and the margin potential of any given business are decoupled from a very important discovery- and that is the consumer sets the price- not the producer.  And in a declining wage environment,  price inelasticity rules the day in the short and in the long run.

Goes211, we have 147 million people in this country (very nearly half the population) with income within 200% of the poverty level. And a declining wage environment. They simply do not have the money to support a price increase of any kind.

 

goes211's picture
goes211
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So where is the disagreement?
darbikrash wrote:

But the most important part of my original post is the part that says that we refer to a “flat or declining wage environment”.  Because the cost to produce and the margin potential of any given business are decoupled from a very important discovery- and that is the consumer sets the price- not the producer.  And in a declining wage environment,  price inelasticity rules the day in the short and in the long run.

Goes211, we have 147 million people in this country (very nearly half the population) with income within 200% of the poverty level. And a declining wage environment. They simply do not have the money to support a price increase of any kind.

 

I agree that right now people do not have the money to support much of a price increase but I guess I don't understand where the disagreement is.  dshields made the comment that business taxes are basically passed on to the customers and you pointed out that in certain situations (like our current declining wage environment) , that is not the case.  However this does not mean that these costs can be added and that businesses will pay them straight out of their profits without also modifying their behavior, which was my point.

ps.  I watched the Yale lectures you linked to in that other thread and I enjoyed them enough to start working my way through them from the beginning.  Interesting stuff.

dshields's picture
dshields
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LOL - sorry to disappoint, not a mindless conservative...
darbikrash wrote:
dshields wrote:

 I know we have had this conversation before, but in general corproate taxes are a pass through.  They just raise the prices of the goods or services to pay it.  It id different as compared to your personal taxes where the government(s) take the money under the force of law from your pay.  You do not have a way to compensate for this.  Corporations generally do so they do.

No.

Corporate taxes are not a pass through. This is a common trope advanced by conservatives to justify lowering (or removing altogether) corporate taxation. In a flat or declining wage environment we have a pretty straightforward concept called price inelasticity. The producer has already effectively adjusted pricing to reflect the maximum the market will bear. If wages are flat, and a cost increase comes along, the producer will bear the cost, not the consumer. We saw clear evidence of this effect of this during the Luxury Tax of the ‘90s’- a complete failure in which demand dropped precipitously when the 10% tax was applied- and applied to the demographic group (supposedly) least affected by price- those buying luxury goods.

For an even more interesting chart (again not to be seen in Heritage reports) is the relationship between corporate tax as a function of GDP overlaid with personal tax as a function of GDP. You can clearly see the redistribution of taxation from corporations to individuals over a period of 40- 50 years- an observation that Heritage would very much not like you to make.

Example of tax incidence

Imagine a $1 tax on every barrel of apples an apple farmer produces. If the product (apples) is price inelastic to the consumer (whereby if price rose, a small demand loss would be accounted for by the extra revenue), the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1. In this example, consumers bear the entire burden of the tax; the tax incidence falls on consumers. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic (if prices rose, more demand would be lost than extra revenue gained), the farmer has to bear the burden of the tax or face decreased revenues: the tax incidence falls on the farmer.

Where the tax incidence falls depends (in the short run) on the price elasticity of demand and price elasticity of supply. Tax incidence falls mostly upon the group that responds least to price (the group that has the most inelastic price-quantity curve). If the demand curve is inelastic relative to the supply curve the tax will be disproportionately borne by the buyer rather than the seller. If the demand curve is elastic relative to the supply curve, the tax will be born disproportionately by the seller.

 

And:

 

Inelastic supply, elastic demand

Inelastic supply, elastic demand: the burden is on producers.

Because the producer is inelastic, he will produce the same quantity no matter what the price. Because the consumer is elastic, the consumer is very sensitive to price. A small increase in price leads to a large drop in the quantity demanded. The imposition of the tax causes the market price to increase from P without tax to P with tax and the quantity demanded to fall from Q without tax to Q with tax. Because the consumer is elastic, the quantity change is significant. Because the producer is inelastic, the price doesn't change much. The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer. In this example, the tax is collected from the producer and the producer bears the tax burden. This is known as back shifting.

 

LOL - sorry to disappoint, not a mindless conservative...

The theory you point out might be true. It is the other side of it. If it is true then we lose more jobs because American corporate costs will go up so companies will make less money and thus will shrink or close. We become less competitive as a country due to higher costs. I think it works out the same either way. The increase costs due to taxes as passed on to the products so they are more expensive and thus less purchased and less competitive OR the companies eat the taxes and make less money so they lay off people to try to get back in balance or close as they can no longer operate at a profit. Or they continue and do not have money to put back in the business and go out of business at a later date. It all ends up the same - less decent paying jobs for Americans. Which theory is better or truer ? I don't know. The truth is probably somewhere in the middle. Companies eat some of the tax increase and pass some through. Besides, the out of control spending spree the fed gov is on can not be fixed by additional biz taxes. Not even close - and this is why. Spending continues to go up and up. I have never seen a tax increase result in a reduction in spending in the government. It just means they spend even more. We are living in the largest debt bubble in history. It will not go on forever. There will come a time when the world will not want any more dollars. When that day comes America will change. The massive transfer payments will be largely cut or maybe stop. It will get really crazy. Americans actually believe they are entitled to live above their means. When they are forced to live within their means there will be civil unrest. You can bet on that.

 

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