Economics Dictionary of ArgumentsHome
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| Tax shifting: Tax shifting in economics refers to the process where the burden of a tax is passed from the entity legally responsible for paying it (e.g., businesses) to others, such as consumers or workers. For example, businesses may increase prices to pass on sales tax to consumers or reduce wages to shift payroll tax costs onto employees. See also Taxation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Tax Shifting - Dictionary of Arguments
Rothbard III 926 Tax Shifting/Rothbard: There are still economists, incredibly, who hew to the old nineteenth-cen- tury "equal diffusion" theory of taxation, which simply closes the problem by proclaiming that "all taxes are shifted to everyone," so that there is no need to analyze each one in particular.(1) Shifting/Rothbard: This obscurantist tendency is fostered by treating "shifting" in too broad a way. Income tax: Thus, if an income tax is levied on Jones at 80 percent, this will hurt not only Jones, but also - by decreasing Jones' incentives as well as capacities - other consumers by reducing Jones' work and savings. Rothbard III 927 Diffusion of effects: It is therefore true that the effects of taxation diffuse outward from the center of the target. Tax burden/VsTax shifting: But this is far from saying that Jones can simply shift the tax burden onto the shoulders of others. The concept of "shifting" will here be limited to the case where the payment of a tax can be directly transferredfrom the original payer to someone else, and will not be used when others suffer in addition to the original taxpayer. The latter may be called the "indirect effects" of the tax. Income Tax: The first rule of shifting is that an income tax cannot be shifted. Shifting/wages/unions/consumption/employers: This formerly accepted truth in economics is now countered with the popular assumption that, for example, a tax on wages will spur unions to demand higher wages to compensate for the tax, and that therefore the tax on wages is shifted "forward" onto the employer, who, in turn, shifts it again forward onto the body of consumers. RothbardVs: (…) yet almost every step in this commonly proclaimed sequence is an egregious fallacy. It is absurd, in the first place, to think that workers or unions wait quietly for a tax to galvanize them into making demands. Workers always want higher wages; unions always demand more. The question is: Will they get more? Problem: There is no reason to think that they can. Marginal productivity: A worker can get only the value of the discounted marginal productivity of his labor. No clamor will raise that productivity, and therefore none can raise the wage he earns from his employer. Unions: Union demands for higher wages will be treated as usual, i.e., they can be satisfied only at the cost of the unemployment of some of the work force in that industry. Taxation: But this is true whether or not there has been a tax on wages; the tax will have nothing to do with the final wage set on the market. The idea that the increased cost will be passed on to the consumer by the employer is an illustration of perhaps the single most widespread fallacy on taxation: that businessmen can simply shift their higher costs forward onto the consumers in the form of higher prices. Prices: the price of a given product is set by the demand schedules of the consumers. There is nothing in higher costs or higher taxes which, per se, increases these schedules; hence, any change in selling prices, whether higher or Iower, will decrease the revenues of the business involved. For each business, on the market, tends to be, at all times, at its "maximum profit point" in relation to the consumers. Rothbard III 928 Taxation/costs: Prices are already at their point of maximum return for the business; therefore, higher taxes or other costs imposed on the firm will reduce their net incomes rather than be smoothly and easily passed on to consumers. (…) no tax (not just an income tax) can ever be shifted forward. >Excise tax/Rothbard. Backward shifting: Taxes, (…) can more readily be "shifted backward" than forward. Strictly, the result is not shifting because it is not a painless process. But it is clear that the backward process (backward to the factors of production) happens more quickly and directly than the effects on consumers. For losses or Iowered profits to liquor firms will immediately Iower their demand for land, labor, and capital factors of production; this falling of demand schedules will Iower wages and rents earned in the liquor industry; and these Iower earnings will induce a shift of labor, land and capital out of liquor and into other industries. The rapid "backward-shifting" is in harmony with the "Austrian" theory of consumption (…); for prices of factors are determined by the selling prices of the goods which they produce, and not vice versa (which would have to be the conclusion of the naive "shifting-forward" doctrine). >Factors of production/Rothbard, >Austrian School. Rothbard III 930 It should be noted that, in some cases, the industry itself can welcome a tax upon it, for the sake of conferring an indirect, but effective, monopolistic privilege on the supramarginal firms. Thus, a flat "license" tax will confer a particular privilege on the more heavily capitalized firms, which can more easily afford to pay the fee. Sales tax: The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply "pass on" the 20-percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! >Sales tax/Rothbard. Rothbard III 931 Forward shifting/Rothbard: The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed wage increase can be shifted forward to higher prices for consumers, thereby "causing inflation." There is here no way that the general array ofprices can rise, and the only possible result of such a wage increase is mass unemployment.(2) Excise tax: A tax on a specific industry, such as liquor, will push resources out of this industry and into others, and therefore the relative price of the taxed commodity will eventually rise. In a general, uniformly enforced sales tax, however, there is no room for such shifts of resources.(3) Backward shifting: A decrease in gross revenue to retail firms is reflected back to a decreased demand for the products of all the higher-order firms. The major result of a general sales tax is a general reduction in the net revenues accruing to original factors. The sales tax has been shifted backwards to original factor returns - to interest and to all wages and ground rents. No longer does every original factor of production earn its discounted marginal product. Discounted marginal value product (DMVP): Original factors now earn less than their DMVPs, the reduction consisting of the sales tax paid to the government. 1. For a critique of this doctrine, see E.R.A. Seligman, The Shifting and Incidence of Taxation (New York: Macmillan & Co., 1899), pp. 122-36. 2. Of course, ifthe money supply is increased after a wage rise, and credit expanded, prices can be raised so that money wages are again not above their discounted marginal value products. 3. Resources can now shift only from work into idleness (or into barter). This, of course, may and probably will happen; since (…) a sales tax is a tax on incomes, the rise in opportunity cost of leisure may push some workers into idleness and thereby Iower the quantity of goods produced. To this extent, prices will eventually rise, although hardly in the smooth, immediate, proportionate way of "shifting." See the pioneering article by Harry Gunnison Brown, "The Incidence of a General Output or a General Sales Tax," reprinted in R.A. Musgrave and C.S. Shoup, eds., Readings in the Economics of Taxation (Homewood, 111.: Richard D. Irwin, 1959), pp. 330-39. While this was the first modern attack on the fallacy that sales taxes are shifted forward, Brown unfortunately weakened the implications of this thesis toward the end of his article._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Rothbard
> Counter arguments in relation to Tax Shifting
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