A former professor of mine (and very brilliant economist), Peter Lewin with an interesting perspective on tax breaks and presuppositions:

The politicians are much exercised about (see a political opportunity in) the question of repealing tax-breaks currently in place for the oil companies.

This resonates with much of the public, because they hate having to pay such high prices for gasoline – it really bites. The most common initial reaction is to welcome the initiative to repeal the tax-breaks.

As I understand it, two things are going on here – punish the oil companies and bring down prices. People are angry with the oil companies. They see prices going up and oil company profits going up. So they think if the tax-breaks are removed that will hurt oil company profits. They are right about that. They also seem to think that it will cause oil and gas prices to fall. They are completely wrong about that – I can’t even see how they get there. But when I point out that removing the tax-breaks will force prices even higher I am mostly met by blank stares. Some sort of presumption is getting in the way.

Let’s be clear about one thing, removing a tax-break is just another way of imposing a tax. Imposing a tax clearly leads to higher prices paid by the buyer (and lower prices received by the seller). Money is taken out of production by the government. The amount supplied at any price goes down, so prices will rise for any given amount demanded. Not rocket science.

It is also relevant to point out, as I always do, mostly to no avail, that companies do not pay taxes in any meaningful sense. A tax imposed on a company is actually “paid” by the customers, workers, suppliers and others connected with the company. The ones who probably pay the least are the fat-cat executives whom the politicians love to scapegoat and the public loves to punish. It’s all a grand and harmful illusion signifying destruction of value.

File this one under “unintended consequences.” The most obvious solution doesn’t always have the intended effect – that’s the biggest lesson I’ve learned from Economics. The general public doesn’t seem to understand that.

Government “punishment” of big companies today is a very popular sentiment. Unfortunately, it generally hurts the end-customer, not the company itself.