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Explain why a 40 percent across-the-board tax increase on business might harm consumers.

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lilylee | Student, College Freshman | Salutatorian

Posted May 30, 2013 at 1:28 PM via web

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Explain why a 40 percent across-the-board tax increase on business might harm consumers.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 30, 2013 at 1:42 PM (Answer #1)

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A 40% tax on all businesses would harm consumers because the tax would lead them to have to pay higher prices for the things that they buy.

While businesses do operate with a profit margin, that margin is typically rather low.  It is typically as low as is possible.  If a firm is charging prices that are too high, it will eventually lose customers either to existing firms or to new firms that enter a market.  Therefore, prices tend to be about as low as they can possibly be.

If, in such a case, a 40% tax is introduced, supply will decrease.  Businesses will have to pay the tax and that will increase their costs of production.  When the cost of production rises, all else being equal, supply will drop.  When supply drops prices go up.

We can also put this in less technical terms.  When taxes are imposed on businesses, they tend to pass the costs of those taxes on to their customers.  They do not make enough profit to simply absorb the costs of the tax so they have no choice but to charge higher prices.

Thus, a 40% tax on business will inevitably lead to higher prices for consumers.

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