In my earlier post, I asked a question on the effects of raised corporate taxes. Will it flow through to the consumers in the form of increased prices?
There are some advocates who insist that any forms of increased in corporate taxes will only lead to higher prices to offset the increase for the corporation. Does this mean that if there is a corporate tax decrease, it will lead to reduced prices for consumers?
On the other hand, there are some who think that corporates will absorb any increase in taxes (as well as enjoy the benefits when taxes are reduced).
Buffett’s view is that it really depends on the strength of the business franchise and regulations.
1) When the franchise is strong and after-tax profits is precisely regulated (eg. utilities), the prices will usually adjust to reflect the change in corporate tax rate.
2) When the business franchise is weak but the industry is price competitive, market forces will usually help to regulate the price.
3) In the case of an unregulated business with a strong franchise, it is usually the corporation that benefits from tax changes. They will increase prices when taxes are increased; and enjoy increased profits (with no reduction in prices) when taxes are reduced.