This is the most succinct explaination for why supply-side economics are always an abject failure. You can substitute 'VAT cuts' with pretty much any incentive that targets producers rather than...
Promises from suppliers to pass on the benefit of VAT cuts are worthless
This is the most succinct explaination for why supply-side economics are always an abject failure. You can substitute 'VAT cuts' with pretty much any incentive that targets producers rather than customers and it holds.
If you want to incentivize people to buy and use sunscreen, mail out coupons good for $2 (or local equivalent) off any sunscreen with SPF 30 or higher.
Why do you need competition to lower prices? You can also lower prices with regulation, or with state-owned production. Easy enough for the state to build a sunscreen factory and sell it at cost....
Why do you need competition to lower prices? You can also lower prices with regulation, or with state-owned production.
Easy enough for the state to build a sunscreen factory and sell it at cost. Or bulk buy the stuff for cheap and give it away, like they already do with drugs and contraception and suchlike. Or regulate - you want to sell sunscreen in the UK? No worries, you have to sell your first million litres to the state at cost, the rest you can put in a fancy bottle and sell as 'premium' to idiots.
The French do something very similar with energy and their electricity costs less than half mine does here in a "competitive" market.
Yes, I was assuming the usual competitive market where stores set prices. When there’s a central buyer, things are different. (Another example: the US government prepurchased Covid vaccines.)
Yes, I was assuming the usual competitive market where stores set prices. When there’s a central buyer, things are different. (Another example: the US government prepurchased Covid vaccines.)
Decreasing the VAT wouldn't change that...it'd just pad the margin. Hence you lower cost to consumer directly, and they can shop around for whoever has the better deal at retail. Even in solar...
Decreasing the VAT wouldn't change that...it'd just pad the margin. Hence you lower cost to consumer directly, and they can shop around for whoever has the better deal at retail.
Even in solar panels with smaller margins...giving steep discounts and/or 0% financing to end users will do far more to facilitate a competitive market than decreasing import costs for suppliers.
Cutting priced in taxes like VAT never works. The best way to "cut VAT" in a way that actually works is to let people submit their receipts with sunscreen purchases for a VAT rebate, rather than...
Cutting priced in taxes like VAT never works. The best way to "cut VAT" in a way that actually works is to let people submit their receipts with sunscreen purchases for a VAT rebate, rather than letting greedy companies nab it for themselves.
Thought experiment: would merchant and consumer behavior change if 100% VAT was imposed? What about 200%? If we accept that yes, raising VAT changes behavior, then why does cutting VAT not change...
Thought experiment: would merchant and consumer behavior change if 100% VAT was imposed? What about 200%? If we accept that yes, raising VAT changes behavior, then why does cutting VAT not change behavior (besides leftwing dogma)?
Some literature also shows that firms with low markups tend to respond asymmetrically to changes in VAT rates. They do not reduce their prices in response to VAT cuts, but they increase their prices considerably if the VAT rate is raised. In addition to that, the pass-through of the VAT rate cut is notably larger in product segments where more brands compete, thus providing evidence for a positive relationship between the VAT pass-through and competitive pressure.
In fact, the pass-through of the VAT rate cut for products supplied by many brands is close to 100%. A smaller share of the VAT is shifted to consumers if the number of brands within a product group is smaller.
In sum, empirical analysis also tends to prove that, usually, there is a pronounced asymmetric reaction to the temporary VAT reduction, although it is difficult to anticipate the exact price adjustment.
It is fair to deduct that, when approving such tax measures, policymakers' expectation is that businesses will pass the reductions on to consumer prices and thereby boost consumer spending. However, according to several studies, most businesses use VAT cuts to improve their finances instead of cutting prices.
So we agree that tax cuts can be passed through, subject to market structure and pricing power. Step 2 is to look at the specifics of sunscreen and EV charging market structures. Looked up a few...
So we agree that tax cuts can be passed through, subject to market structure and pricing power. Step 2 is to look at the specifics of sunscreen and EV charging market structures.
Looked up a few large sunscreen manufacturers (P&G, Unilever, L'Oreal, Estee Lauder) who all have EBITDA margins of 20-25% (Bloomberg). Keeping 100% of a UK VAT cut is effectively a 20% price hike, worth an additional c12.5 points in margin - or 50% to their margin overnight. It's a classic prisoner's dilemma, and would inevitably break in a fragmented market (which this is). If you look at the retailers (e.g. Walgreen's, CVS) their net income margins are like 1-3% which I think needs no further explanation.
EV charging - this is a pure infrastructure/commodity business. There is zero pricing power so you can expect any tax cut to be fully passed through. Have you ever seen a gas station charging double its nearby competitors?
To give more context on the website, it's run by a guy Dan Neidle who's Labour and has strong tax and spend instincts. 'Independent' here doesn't mean 'intellectually honest' / 'no agenda'.
Finally his own argument (below) contradicts the entire article. Why don't these companies double their earnings via pricing? The incentives are certainly there, and I doubt they're holding back out of altruism. The simplest (and correct) explanation is they simply can't.
In a market economy, economic actors charge what the market will bear.
I don't care this much. I provided you with a source that looked at studies that show that it's an asymmetrical response to VAT tax increases. So it's not just dogma.
I don't care this much. I provided you with a source that looked at studies that show that it's an asymmetrical response to VAT tax increases.
This is the most succinct explaination for why supply-side economics are always an abject failure. You can substitute 'VAT cuts' with pretty much any incentive that targets producers rather than customers and it holds.
If you want to incentivize people to buy and use sunscreen, mail out coupons good for $2 (or local equivalent) off any sunscreen with SPF 30 or higher.
To get lower prices you need competition. That happens in some markets like solar panels, but health and beauty products tend to be high-margin.
Why do you need competition to lower prices? You can also lower prices with regulation, or with state-owned production.
Easy enough for the state to build a sunscreen factory and sell it at cost. Or bulk buy the stuff for cheap and give it away, like they already do with drugs and contraception and suchlike. Or regulate - you want to sell sunscreen in the UK? No worries, you have to sell your first million litres to the state at cost, the rest you can put in a fancy bottle and sell as 'premium' to idiots.
The French do something very similar with energy and their electricity costs less than half mine does here in a "competitive" market.
Yes, I was assuming the usual competitive market where stores set prices. When there’s a central buyer, things are different. (Another example: the US government prepurchased Covid vaccines.)
Decreasing the VAT wouldn't change that...it'd just pad the margin. Hence you lower cost to consumer directly, and they can shop around for whoever has the better deal at retail.
Even in solar panels with smaller margins...giving steep discounts and/or 0% financing to end users will do far more to facilitate a competitive market than decreasing import costs for suppliers.
Cutting priced in taxes like VAT never works. The best way to "cut VAT" in a way that actually works is to let people submit their receipts with sunscreen purchases for a VAT rebate, rather than letting greedy companies nab it for themselves.
Thought experiment: would merchant and consumer behavior change if 100% VAT was imposed? What about 200%? If we accept that yes, raising VAT changes behavior, then why does cutting VAT not change behavior (besides leftwing dogma)?
it's Asymmetrical
So we agree that tax cuts can be passed through, subject to market structure and pricing power. Step 2 is to look at the specifics of sunscreen and EV charging market structures.
Looked up a few large sunscreen manufacturers (P&G, Unilever, L'Oreal, Estee Lauder) who all have EBITDA margins of 20-25% (Bloomberg). Keeping 100% of a UK VAT cut is effectively a 20% price hike, worth an additional c12.5 points in margin - or 50% to their margin overnight. It's a classic prisoner's dilemma, and would inevitably break in a fragmented market (which this is). If you look at the retailers (e.g. Walgreen's, CVS) their net income margins are like 1-3% which I think needs no further explanation.
EV charging - this is a pure infrastructure/commodity business. There is zero pricing power so you can expect any tax cut to be fully passed through. Have you ever seen a gas station charging double its nearby competitors?
To give more context on the website, it's run by a guy Dan Neidle who's Labour and has strong tax and spend instincts. 'Independent' here doesn't mean 'intellectually honest' / 'no agenda'.
Finally his own argument (below) contradicts the entire article. Why don't these companies double their earnings via pricing? The incentives are certainly there, and I doubt they're holding back out of altruism. The simplest (and correct) explanation is they simply can't.
I don't care this much. I provided you with a source that looked at studies that show that it's an asymmetrical response to VAT tax increases.
So it's not just dogma.
Any and every political opinion has a study backing it up. They can't all be correct.
Ok