In MES Rothbard claims that sales taxes don’t affect the prices of goods in shops because any increase will be absorbed by the business selling the goods (and presumably a decrease won’t result in retailers cutting prices). However, over here in the UK we had a VAT reduction from 17.5 to 15% at the beginning of the year. Many shops cut their prices accordingly. Now the 17.5% rate is about to be re-introduced and shops are preparing to increase their prices again (albiet not straight away).
While Rothbard’s argument is convincing it strikes me that it doesn’t apply in all circumstances.
You are not applying ‘ceteris paribus’. A rise in the salestax will cause a rise in prices, but not because the tax is ‘shifted’ to the consumer, but because supply will decrease. (Lower marginal supply, higher marginal price.)
The logic behind this is that because of the higher ‘income tax for selling stuf’ will cause people who sell stuff to, on the margin, decrease their supply because some stuff on the margin won’t be profitable anymore. When you lower supply, price will go up. That’s the logic - nothing else.
I hope this makes sense to you: I have a difficult time explaining what I try to explain.
It does make sense, I read that in MES too. However, I’m not entirely convinced this happens in all cases. Firstly there’s no evidence of any decrease or increase of supply caused by the VAT changes. Secondly, the price changes are the same as the VAT changes - you would expect them to vary if they only indirectly caused by the tax change. Thirdly, some prices are changing on the same day as the VAT changes - one would have thought there’d be a delayed reaction if it was caused by supply changes.
Is there anything else going on in the economy which may be overshadowing this effect? I mean, a rise in prices of X can be outstripped by demand and would still mean more supply in the end at the higher price because for whatever reason people just want more of X than before for non price related reasons. In these times who knows what the hell is going on? Rothbard’s point holds, however it’s all else being equal. All else is rarely if ever equal, and now a days, who knows.
It’ not something you can accurately measure. The evidence is in the deduction that leads to the conclusion. It is derived from Subjective Value Theory. If STV is to remain valid at all times, then the subjective valuation of consumers is independent of the costs imposed on the seller. Therefore, the incidence of taxation must aways be backwards (away from consumers) and never towards consumers
.
This could be the result of
Supply already reduced ahead of time in expectation of falling demand. (It’s not like the VAT was a surprise)
A reactionary response by the sellers who will eventually discover their error and adjust their prices accordingly.
If demand is inelastic the volume of sales will not decrease despite the increased prices, thus higher spending by consumers both individually and overall.
This is true, but “elasticity” is just a mental concept. It cannot be calculated or measured and is subject to change all the time, i.e., the tax may have no affect today but perhaps it will in a year or vice versa.
