Showing posts with label FAA. Show all posts
Showing posts with label FAA. Show all posts

Tuesday, August 09, 2011

The Tax Cut Experiment

Last month the Republicans inadvertently conducted a test to see how tax cuts affect pricing. The result undercuts their own arguments.

Last month the FAA's authorization to collect taxes on airline tickets lapsed. According to who you ask, this was the result an argument over welfare for rural airports or another of the right's never-ending attempts to destroy unions in America.

When the tax was removed, the airlines quickly raised ticket prices to their previous levels, pocketing the tax money instead of passing the savings on to consumers. Now that agreement has been reached in Congress, the FAA has been reauthorized and the ticket tax has been restored, airlines have been rolling the fare increases back, so that ticket prices remain the same.

The airlines have essentially swallowed the tax increases, reducing their own profits. There are lots of reasons for this, but the simple fact is that companies generally charge as much for things as they can get away with.

The larger lesson is that raising corporate taxes does not mean that the companies will automatically raise prices for consumers, or that the companies will go out of business, or they will flee to other states and countries.

Pricing is a very sensitive issue. Prices cannot rise too high otherwise demand will crater. Most people do not have to fly on airplanes: people can vacation closer to home, and businessmen can choose to use teleconferencing instead of meeting clients face-to-face. So airlines constantly monitor and tweak fares to maximize profit, keeping the planes as full as possible while keeping costs like fuel as low as possible.

Profitability at corporations varies widely. Some industries don't have intense material or capital costs. Lady Gaga can reduce the price of her latest album from $8 to a buck on and still make millions, while a grocery store chain's ability to sell food cheaply depends on weather, colony collapse disorder in bees, immigration law, political instability in the Middle East and oil spills in the Gulf of Mexico. Legal and financial products are even more flexible: they're intangibles that only have the value that we arbitrarily assign them.

What this means is that taxes on highly profitable industries that don't have large capital expenses can be raised without really affecting their prices, because they have the flexibility to reduce salaries but their prices are already maxed out. For example, law firms that charge $1,000 an hour could easily pay much higher taxes by cutting the salaries of lawyers who make 10 times what an average person makes. The financial industry could easily pay higher taxes by cutting salaries of hedge fund managers who make millions of dollars a year and pay taxes at the outrageously low capital gains rate of 15%.

All tax cuts and tax increases are not created equal. Since the US economy is driven by consumer spending, tax policies that put more money in the hands of more people provide the biggest boost.

The Bush tax cuts have not done that. The S&P downgrade acknowledges this. The stock market understands this. Everyone knows these things are true, but the Republicans stubbornly refuse to acknowledge reality purely for political gain.

To fix our problems some taxes have to go up, government expenditures (especially defense and entitlements) have to come down , as does the cost of medical care, and more money has to wind up in the hands of the bottom 90% of the US population, instead of just lining the pockets of the wealthy.