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Economic theory tells us why we should not be surprised that Google, Amazon and Apple decided to pass on higher taxes to consumers through higher prices

After a number of European countries announced new taxes on the revenues of Apple, Amazon, and Google, these companies have decided to raise prices on digitals services instead.

Apple on Tuesday announced a series of adjustments to its App Store fees in various countries as a result.

Included in the list were four countries whose new digital services taxes (DSTs) have prompted Apple to up its fees for developers: France, Italy, the UK, and Turkey.

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Google warned UK advertisers on Tuesday that starting in November they will be shouldering the cost of the tax with a “2% DST fee.” It will also start charging additional 5% fees in Austria and Turkey, according to an email sent to advertisers on Tuesday.

“The Regulatory Operating Costs are being added due to significant increases in the complexity and cost of complying with regulations in Turkey. In Austria and the United Kingdom, the DST Fee is driven by the new digital services tax in these countries,” the email, which was shared with Business Insider by a Google spokeswoman, reads.

“Digital service taxes and other regulations increase the cost of digital advertising,” Google’s spokeswoman said, adding that the firm would pay its taxes wherever it operated and would lobby for international tax reform.

Amazon told UK third-party sellers in August their fees would increase by 2% in response to the tax starting September 1.

An Amazon spokesman told Business Insider the company held off on raising its fees until the legislation for the UK’s tax was passed.

Here is why this should not be surprising

When it comes to who ultimately bears the burden of corporate tax, the answer depends on how responsive demand is to price changes, also known as price elasticity of demand. When demand is inelastic (graph 1), a unit increase (decrease) in price results in a less than a unit decrease (increase) in quantity demanded. In this case, corporations have more wiggle room to raise prices before they can start to see demand for their goods go down. So they usually pass the majority of the tax or the entire tax to consumers through higher prices.

On the other hand, if demand is elastic (graph 2), that is a unit increase (decrease) in price results in more than a unit decrease (increase) in quantity demanded, corporations are warier of raising prices. Therefore they tend to leave prices the same or increase them just slightly when taxes are raised. Corporations in this case tend to bear the majority or entire burden of a tax increase. The level of elasticity for a particular good determines how the tax burden (incidence) will be shared between a seller and consumer.

Apple, Google, and Amazon are big companies, whose services are constantly in high demand. For as long as this holds true, economic theory dictates that these corporations will likely respond to higher taxes by raising prices.

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