Study Guide to Man, Economy, and State with Power and Market

160 Study Guide to Man, Economy, and State with Power and Market
C. Shifting and Incidence: A Tax on an Industry
It is a myth (in both mainstream economics and the
public at large) that taxes on a firm can be “passed on” to
customers. If firms could really do this—i.e., raise prices
to generate extra revenues to offset a new tax—then why
didn’t the firms do it before? It is true that a tax will eventually
raise prices paid by consumers, but this is achieved
by lowering profitability and hence supply, which then
raises the equilibrium price.
D. Shifting and Incidence: A General Sales Tax
Even in the “obvious” case of a general sales tax, it is
simply not true that businesses can pass on price hikes to
customers. What happens instead is that the tax is shifted
backward to the imputed DMVPs of the factors of production.
Thus a firm reacts to a new tax not by raising its
prices to customers, but by lowering its payments to factor
owners.
E. A Tax on Land Values
Many analysts think that taxes on land do not distort,
since (unlike other resources) land cannot shift out of a
taxed industry. This is not true, because land owners provide
a definite service by discovering and allocating land
to the highest bidders. If the government imposed a 100
percent tax on ground rents, it is true that the real estate
would not physically disappear. But the affected owners
would certainly stop advertising the parcels in the hopes
of finding higher bidders, and no one would try to find
new plots of land.