Hi John,
It depends on the kind of tax we are talking about: direct or indirect?
Apart from that, you must consider the original tax rate and the new one to estimate the differential tax rate. It's not the same an Income Tax over the Profit, than a VAT or Sales tax. There always is an optimum tax rate that maximizes Social Welfare, although it's difficult to estimate.
Lecturers on Public Finances used to say until recently, that most of taxes are transferred to consumers in the medium and long term. This being the case, Profit Margins will hardly be affected in the long run.
Hope this brings some clarity to this issue.
The simplest answer is that tax on inputs will increase production cost, thereby reduce profit, other things remaining the same. Tax on sales and profit reduce net profit. High tax on inputs and also on profit are obviously detrimental for business growth because of inadequate reinvestment. Depending on circumstances and public policy in a given context, appropriate analysis of incidence and impact of tax will be needed to assess outcome. Generalisation should be avoided.
Tax rate such as Tariffs and Quotas will increase the price of the good in the domestic market. Domestic producers benefit because they receive higher prices. The government benefits by collecting tax revenues.
The main problem is that tariffs distort the market signals that could guide an efficient allocation of the economy’s resources. Without tariffs, most developed Nations would produce fewer agricultural goods and more manufactured goods and services. It would thus profit more from the international specialization of production by focusing on those high-value-added segments where it enjoys a comparative advantage.
In addition, the difference in tariffs across agricultural products distorts farm production. Developed nations farmers grow those products that are heavily protected and not those in which they are internationally competitive.
E.g. EU agricultural policies have increased agricultural prices by 12% in 2008, transferring € 36 billion from consumers to producers. This is particularly damaging to low-income households that spend a relatively high proportion of their income on food.
The tariffs levied around the globe lower worldwide demand for imports and thus world market prices of agricultural products. On one hand, this is desirable because most of the poorest households in developing countries consume more food than they produce. On the other hand, it harms poor farmers and also hired workers. Since farming needs much unqualified labour, lesser agricultural production deteriorates wages for unskilled workers in the entire economy. In the balance, developed Nations agricultural tariffs probably exacerbate global poverty.
Therefore tax rate have a moderate effect on the profit margin of an agribusiness.
Hi all,
This is a very general question, and does not specify what kind of TAX we are referring to. That's why I asked what kind of TAX we are talking about: Direct or Indirect.
Most Constitutions and Tax Laws identify these taxes and I will cite a Public Finance lecturer: "Traditionally taxes have been classified between Direct and Indirect. Direct taxes are those those that tax immediate expressions of taxable capacity: net profit or Net equity. On the other hand, Indirect Taxes, tax mediate expressions of taxable capacity, such as consumption...It was thought that the defining criteria consisted in the transfer of the tax: direct taxes would be those that cannot be transferred, while indirect taxes can be transferred. This is not necessarily true" (Public Finances, Nunez Minana, pages162-163)
This same idea can be read in Musgrave & Musgrave, Public Theory and Practice and in Due & Friedlander, Government Finance-Economics of the Public Sector.
Laffer Curve explains why the base tax rate and the final tax rate are important, locating the tax increase/decrease on a specific point/section on the curve.
It's not the same a TAX over families and firms, over inputs (factors) or products, or over buyers and sellers. The economic effect will differ. The TAX specification is important to forecast its economic impact on social welfare and profit.
Regarding tariffs, they may be imposed on IMPORTS or EXPORTS, not solely on IMPORTS; the economic effects being different.
Quotas are quantitative restrictions on Imports or exports, and represent an absolute variable, not a proportional variable as a RATE. QUOTAS are not TAXES.
Regarding the INCOME TAX, Due & Friedlander state that "traditionally economists said that a tax over a net profit could not be transferred forward and that's why this should decrease the income of the firms' owners. This conclusion is ONLY valid under conditions of PERFECT COMPETITION in the product markets...This is not valid in cases of Imperfect Competition, and the Income Tax over commercial firms will be transferred forward" (Chapter 13 of the Spanish Edition)
Most Lecturers in TAXATION and PUBLIC FINANCES would say that empirical studies regarding tax transfers are not conclusive, and that apparently most taxes are transferred forward in the long run.
And I would again say: "IF THIS is the CASE", in the "long run" the profit rate or margin would not suffer any variation, no matter which kind of TAX we are talking about.
This has been a very general answer, to a very general question with the only intention of CLARIFYING this issue.
In most situations, taxes on commercial enterprises are determined after profit or loss is calculated. Therefore a changing tax rate should not affect loss/profit determinations, but will increase operational expenses as the tax that is determined will be an obligation of the operating business and/or its owners.
It does have an impact. The extent is a function of the rate and how well it is enforced. When the larger section of the industry or business is unorganized, a increase in rates impacts the organised sector disproportionately, as the unorganised sector manages to find ways to evade being taxed.
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