3 ms·
When in the supply-chain you are creating the "taxation" matters to the final cost, assuming 1) the gross margins remain the same and 2) the costs scale linearl
by _diyar 1y ago
When in the supply-chain you are creating the "taxation" matters to the final cost, assuming 1) the gross margins remain the same and 2) the costs scale linearly.
Consider a fictional supply-chain with three players A, B, C. Assume that B and C have 50% gross margins.
In a no-tax world, if A sells the product to B for 10$, then B to C for 20$, C will sell it retail for 40$. (A:10$ -> B:20$ -> C:40$)
Now imagine a 100% tariff scenario for the transaction between A and B. Now, A sells the product to B for 20$ (10$ + 100% tariff), then B to C for 40$, C will sell it retail for 80$. (A:20$ -> B:40$ -> C:80$). This nets the government 10$
In a third scenario, imagine a world where this 10$ is not charged as a tariff but as a sales tax. A sells to B for 10$, B to C for 20$, and C to the customers at 50$ (40$ + 10$ freedom tax).
By changing where in the supply chain the tax is levied, we arrive at a lower retail price for the same tax income. This is a natural consequence of the above two assumptions, especially the idea that costs scale linearly. If maximum income from the taxation of imported goods is your goal, this is the way to go. Whether this would have the desired effect of discouraging imports is another matter.
- SoftTalker 1y agoI think in your scenario that B and C would drop their margin percentage because the tax does not represent anything that will increase their costs in handling the product. E.g. B would sell to C for $30 and C would sell retail for $50, making the same profit in dollar terms. If they don't, a competitor will, because a consumer will prefer the $50 price to the $80 price.
- _diyar 1y agoYou're suggesting businesses B and C would just absorb the tariff cost by reducing their margin percentage to keep the same dollar profit. However, as Cerium noted earlier, many business costs do tend to scale with the price of goods, making this difficult without impacting profitability. For financial costs, higher inventory value due to tariffs increases the cost of capital (interest on loans/tied-up funds), insurance premiums, and potentially transaction fees. For operations costs (handling and labor), increases due to indirect effects: As the price of the average consumer basket increases due to tariffs, the average citizen either demands and receives higher wages or has to reduce spending; this means that the per-item variable cost of processing goes up, either because the wages of those employees increased (higher wages) or because the sales volume decreases (reduced spending). Of course this does not mean that every business will have exactly this outcome. And absolute size of these effects is also dependent on the actual demand elasticity.