Corporate Tax: Do Consumers Ultimately Pay Increases?

Martin Jacob / Maximilian Müller / Thorben Wulff - November 27, 2020

Tips for practitioners

Corporatetaxation in Germany is effectively divided into three categories: income, consumption, and substance. The relevant revenues for financing municipalities are generated from corporate tax or from their respective share of incometax. However, since corporate tax is the only tax which municipalities can determine independently, it is also the most popular one to raise. Taking large regional differences into consideration, hundreds of municipalities in Germany raise corporate taxes every year to fill gaps in their budgets. Therefore, the authors of the study focus on this source of income.

Do tax increases for gas stations affect consumers directly?

Researchers observed the dense German gasstationnetwork with its more than 15,000 individual branches over a period of five years. In doing so, they compared gas stations in municipalities which increased the corporate tax with those that did not. For the vast majority, the authors of the study found that fuelprices increased 0.1 Euro cents on average for each percentage point the corporate tax was increased. As such, if a municipality increased the corporate tax, for example by five percentage points, the gasoline and diesel prices at gas stations located there also increased on average by half a cent. In adjacent municipalities, where corporate tax remained the same, so too did gas prices.

Thus, researchers were able to illustrate that municipal tax increases do not necessarily affect owners' revenues or the job security of lower level employees, who are usually the first to be laid off in other industries when profit margins begin to decline. In the end, the consumer receives the brunt of the price increase, at least with regards to fuel. Although the study focused on the gas station network, the findings result in another assumption: other companies that sell necessary products whose prices fluctuate in the short term are also going to adjust prices after corporate taxes have been increased. This finding is relevant for political decision-makers in the municipalities, because it dictates that if they want to increase their revenues, they must increase corporate taxes. Realistically and ideally, they should take care that these price adjustments are not passed on to the consumers at all.    

Why some gas stations pass on tax increases quickly and others not at all

When comparing municipalities, it was observed that increases in corporate tax were passed on quickly and often entirely to the consumer. However, research evidenced that there were some municipalities in which price increases did not occur at all. According to the researchers' analysis, these phenomena occur predominantly in municipalities close to certain German borders. They reflect the effect of average fuel prices in adjacent countries on domestic gas stations. The reasoning behind this is the concept of price elasticity. If the gasoline prices in bordering countries were higher on average than in Germany , the gas stations close to the border would quickly adjust their prices after a corporate tax increase in their respective municipality. However, if the municipalities with tax increases shared a border with countries that have lower average gas prices than Germany, the gas stations would have to forgo an increase in prices due to the competitive environment.

Further price drivers for the consumers

In their analysis of German gas stations, the researchers were also able to identify other price drivers for consumers. Brand-name gas stations, stations located next to freeways, or those which are open 24 hours charge higher prices on average. Awareness of the underlying price drivers would allow for further savings on the part of the consumer.

Literature reference and methodolgy

Professor Dr. Martin Jacob and doctoral student Thorben Wulff from WHU - Otto Beisheim School of Management and Professor Dr. Maximilian Müller from ESMT in Berlin have come to the conclusion that corporate taxes are often passed on directly to the end consumer. In their study, the three researchers examined the dense German gas station network with its more than 15,000 individual outlets. The results are published in detail in their study "Do Consumers Pay the Corporate Tax?"

• Jacob, M./Müller, M./Wulff, T. (2020): Do Consumers Pay the Corporate Tax?, in: TRR 266 Accounting