Corporation Tax: Do Consumers Pay In The End?

It has long been suspected that companies generally pass on tax increases to their consumers. Professor Martin Jacob and doctoral student Thorben Wulff from WHU - Otto Beisheim School of Management and Professor Maximilian Müller from ESMT in Berlin did test this now. In their study "Do Consumers Pay the Corporate Tax?", they examined the network of gas stations in Germany with more than 15,000 retail branches. The researchers found that the gas stations pass on corporate tax increases to consumers via higher prices. This fact is particularly important for political decision-makers, because hundreds of municipalities are regularly increasing their local business tax annually. It is often used as a tool to obtain higher tax revenues, but according to the findings of the study, it is indirectly the consumer who pay instead of the company.

As the scientists found out, the price of petrol was increased by an average of 0.1 cents when the local business tax in a municipality increased by one percentage point. This proved that tax increases for companies not only affect owners or low-skilled employees, but also consumers. For the time being, however, this has only been proven for necessary consumer goods such as fuel.

In their analysis, the researchers compared the gas prices of gas stations in municipalities that raised corporate tax with adjacent municipalities that did not. As a result, prices for motorists were higher almost everywhere where corporate tax was also increased. However, there were exceptions at some gas stations because one factor is decisive for the passing on of costs: the price elasticity of consumers. For example, in areas with a very dense network of gas stations, firms were unable to pass on the tax increase to customers because of the competition. Similarly, petrol stations with competition from nearby foreign countries, where petrol and diesel prices are lower than in Germany, were unable to raise consumer prices. In contrast, tax increases were passed on to consumers to an even greater extent when petrol prices in the neighboring country was higher anyway. Following tax increases, particularly brand-name gas stations and branches located directly at the motorway or with opening hours at night increased gas prices to a greater extent.

As the gas stations themselves only have less than ten percent leeway in terms of prices, there were clear signs that corporate tax increases were being passed on. As a result, the vast majority of gas stations have a so-called "tax shield" which makes it possible to pass on tax increases to customers and thus protect their own profitability.