The surprisingly hard question of who pays taxes

Tax incidence, explained

A Slow Boring subscription costs $80 per year, but that doesn’t mean I get $80 per year per subscriber. What happens is that Substack takes a 10 percent cut of all subscription revenue, and Stripe charges 2.9 percent on all transactions, plus 30¢ per transaction. In some sense, I would love to be able to tell people that the price of a Slow Boring subscription is $69 or so dollars a year — what I actually get — and then tack a bunch of Stripe and Substack fees on at the end. Substack and Stripe, however, do not let people price that way since they are trying to create a healthy ecosystem of e-commerce and payments, rather than one that is afflicted by weird hidden fees.

There’s been a lot of discussion of this kind of thing lately, thanks to the FTC’s push to crack down on “junk fees.” But what I want to talk about today is not fee regulation. I want to talk about what economists call “incidence,” and it’s mostly relevant in the context of taxes rather than fees.

The case of fees, though, is a useful illustration, because it’s generally a less politicized space. And there are a few different things going on here:

• One is the presentation of the pricing to the public. I set a price ($80), which is what you (the consumer) pay to me (the price-setter), who then pays out fees to business partners (Stripe and Substack).

• Another is the mechanics of the operation, in which your money goes to a payment processor (Stripe), who then pays its clients (me and Substack).

• And finally there’s the incidence. Substack charging 10 percent rather than 5 percent imposes some kind of cost on the other parties to the transaction. How much of that cost is borne by me and how much is borne by you, the reader?

The key point about incidence is that it is not determined by the mechanics or the public presentation.

It also doesn’t really matter whether it’s a tax, or a fee, or just some other cost of doing business. The price of an airline ticket clearly has something to do with the price of jet fuel. But just because jet fuel prices drop, doesn’t mean that plane tickets will automatically get cheaper. At the same time, if you look at a situation where jet fuel prices drop and profit margins expand, you can’t just say “corporate greed!” The corporations were greedy before the fuel price dropped. You need some specific economic inquiry to understand under what circumstances a drop in the price of jet fuel lead airlines to cut prices (robust competition) and under what circumstances it does not (you’re the only airline flying that route).

And this is important to tax policy. Part of Donald Trump’s pitch for corporate income tax cuts is that contrary to the formal mechanics, this is not just a gift to the people who own businesses. And part of Donald Trump’s pitch for higher taxes on imported goods, is that this will follow the formal mechanics, with the taxes paid by foreign producers rather than by American consumers. If you believe him about both of those things (and I doubt that you should), then he is proposing to partially offset the cost of a tax cut for American workers via a tax on foreign producers. If you make the opposite set of assumptions — which is over-simplified but closer to the truth — you come to the conclusion that it’s a tax increase imposed on 80 percent of the population in order to benefit the rich.