I'd like to sell you a sandwich.

An analogy of Gasoline prices and the American free market.

I'm a sandwich maker, I make and sell sandwiches. I buy my ingredients, bread, meat, lettuce, tomato, mustard, mayonaise, etc., at the local market.

I sell each sandwich for $1.00.

The ingredients for a single sandwich cost me $0.75. Part of that $0.75 is sales tax, 8%, or 5.5 cents.
The government (State, Local, & Federal) requires that I collect $15.5 cents for taxes on each sandwich I sell.

So after selling you the sandwich for $1.00, recouping the cost of making the sandwich, and taking out the taxes, I have 9.5 cents in profit. But, because that is income, the government wants part of that too. In my current tax bracket I pay 31.6% in taxes. So, 3 cents on each sandwich I sell also goes to the government.

So, for the sandwich I made, the store that sold the ingredients got 69.5 cents, the government who did nothing at all got 24 cents, and I got 6.5 cents. So my percentage of profit is 6.5%.

Let's say I sell 88 Billion Sandwiches, at $1.00 each.

It has now cost me $61.16 billion dollars in ingredients.

You might think that I would get $5.72 billion after taxes but I'm in a much higher tax bracket and now instead of 31.6% in taxes,
I pay 83% in taxes, or $6.9388 billion.

So, 8% of the $61.16 billion for the ingredients is $4.8928, plus 15.5% of the $88 Billion in sandwich sales is $13.64 billion. $4.8928 + $13.64 + $6.9388 = $25.4716

So the government gets $25.4716 billion total, even though it still hasn't done anything to contribute to the sandwich making.

I'm left with $1.3684 billion dollars in profit. My profit percentage is down to just 0.01555.

One day the price of Bread goes up 150%. So now the ingredients for 88 Billion sandwiches costs $70 billion instead of $61.16 billion. I don't want to make less of a profit, So the price of a single sandwich goes up from $1.00 to $1.11.

88 billion sandwiches at $1.11 = $97.68 billion
Ingredients = $70 billion
Taxes = $5.6 (8% of $70) + $13.64 (15.5 cents per sandwich) + $7.0052 (income tax on my profits) = $26.2452 billion
Profit = $1.4348 (0.01469%)

So the sandwich buyers look at the extra 11 cents they had to pay and then they look at the extra $66.4 million dollars I made selling this batch of sandwiches and accuse me of price gauging even though my profit margin is actually smaller. While behind the scenes the government laughs it up with the extra $773.6 million dollars they got (almost 12 times more than what I got) for doing nothing.

So when 8% of that extra 11 cents you are paying is for taxes, and only a seventh of 1% of that extra 11 cents is my profit who's really gauging the average american sandwich buyer?

Subsidies -
In response to Jason's question about subsidies here is a quick tutorial on subsidies as it would relate to my Sandwich business.

One of the reasons reasons the tax on each sandwich is so high, is so the government can use the money for Sandwich subsidies. Subsidies are money that the government pays to a business so that the business will do something it wouldn't normally do on it's own, because it isn't profitable. So far as I know the amount a company receives in subsidies isn't included as part of their reported profits, but I could be wrong about that. Since subsidies are not used in any way to pay for Sandwich production I didn't mention it in the calculations above.

In this case the government pays me a subsidy to maintain a reserve storage of bread, meats, and other ingredients. See, the government is worried that so many people depend on my Sandwiches. If there was an emergency such as a hurricane destroying the wonder bread factories, then there would be a shortage of bread and therefore sandwiches, and this would drive up sandwich prices to $3.00 a sandwich. So the government pays me to keep a reserve supply of bread, which I wouldn't normally do, because I don't make any money storing bread.

Another subsidy the government pays me, is to help defend, service and maintian wheat and tomato crops in areas where they are in danger due to some local political unrest. For example, most of our tomatoes come from Northern California. The military invades Northern California to get that horrible dictator Arnold Schwarzeneggar out of power. This endangers tomato production, so I help to keep the tomatos safe, again insuring that the Sandwich supply remains stable.

The government also pays me a subsidy to research ways to make Sandwiches more healthy, and ways to reduce the amount of waste produced from Sandwich consumption (wrap your head around that one).