Tuesday, April 12, 2011

Phrases designed to infuriate economists

"About 50 high polluters to bear carbon tax brunt, Greg Combet tells Press Club"

Politicians love statements like this. Don't worry about this big tax I'm about to pass, it will only be paid by those evil corporations!

The first problem with this is that corporations don't pay tax, shareholders pay tax. A corporation may be a separate legal entity, but sooner or later its cashflows belong to the shareholders, who are real flesh and blood people.

In Australia, this is particularly pertinent as superannuation retirement savings are (by law) generally invested at least partly in the stockmarket. So the only people paying the tax are those evil corporations and, oh, your retirement portfolio.

But suppose we don't care about those evil capitalist shareholders either - we're cool then, right?

No, we're not. You can place a tax on producers but that doesn't mean it will end up being paid by the producers. In economics terms, the incidence of a tax does not stay where it is placed.

So who else pays for it?

Customers, that's who. If I raise taxes on coal and petrol, part of that cost will be paid for by coal and petrol producers in lower profits, and part of it will be passed along to consumers through the form of higher coal and petrol prices. And part of those coal price increases will in turn be passed on to consumers of other products, who pay more for all the items that have to transported via petrol powered cars, and manufactured in factories running on coal powered electricity. Which is to say, everything in the economy.

The only case where coal producers pay the whole amount is if demand for coal and petrol is perfectly elastic. That is, if the price of petrol rises by one cent, you reduce your demand for it to zero.

Is that how you decide whether to fill up your car each week?

No, me neither.

This tax will be paid by the general public twice, once as shareholders in companies, and again as consumers of products produced by fossil fuels.

Typical of fools from union backgrounds, Greg Combet appears to view the world as a zero sum game of workers against the corporations. He is either ignorant of basic economics, or is being deliberately misleading for political gain.

If you don't believe me, let Milton Friedman explain it far better and more persuasively.

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