Bastiat wrote that “Taxes must, in the end, fall upon the consumer”. Isn’t the truth the exact opposite?
Taxation is a parasitical activity. A parasite can only leech off of a productive host; it cannot leech off of a corpse. You can only tax wealth that has been produced. Therefore, only producers can be taxed; a “consumption tax” is a myth.
What was Bastiat trying to say?
If only we had more Austrian entrepreneurs…
Taxes are priced into the cost of the good.
Tax is just another overhead from the perspective of a businessman. When costs go up, he raises prices to compensate, he doesn’t absorb every expense increase from his profit margin. Ultimately, he runs into a price ceiling where his costs are greater than he can raise prices, and thus the industry becomes uncompetitive to be in (less profitable), and competition dwindles.
Taxes make the consumer worse off because he can buy less. Taxes make the producer worse off because his prices are higher than they need to be, and thus he will have difficulty competing. Which again hits the consumer, because he has a less robust marketplace to shop from.
Just what he said. When the grocery store charges you $4 for a gallon of milk, it is passing on the taxes it must pay to you, including the salaries of its employees, who in turn bargain for a salary that accounts for the income tax they’ll have to pay.
I think you’re envisioning a static model.
Yep. And we are headed for the 70’s all over again: lower living standards, higher costs, confiscatory taxation and regulation, higher interest rates, etc
Taxes hit property owners the hardest.
Consumers need to produce things in order to buy what they consume. Consumers are also producers. Except for gov’t employees of course.
Either the producer has to take a hit off for a loss of profit due to the tax, or hike up the price of the product. The producer can only take so many tax hikes before the consumer has to pay for it. Even if the producer isn’t raising the prices, he in turn is going to consume less in his life or invest less into his business (perhaps by not hiring someone who needs a job, thus hurting another consumer). The only people who make out on taxes are govertment subsides, uber rich business who can afford the loss while the compition dies, and government employees.
Taxes: this is what humanitarians, bored rich kids, and the fashionably educated promote.
When I say the producer can only take so many tax hikes before the consumer pays for it, I mean an actual factual direct raise in the price of the product. Not an indirect/unseen payment, in which case the damage is already done.
Income tax is equal on all producers. I believe Bastiat is referring specifically to taxes on business profit, before it is paid out in dividends.
If that post is refering to me, so was I. Perhaps I was unclear of that. Usually when I use the word “producer”, I usually mean where the money supply/ production starts (so the business owner, investor) not that others aren’t producers or people of lesser fabric, it is just a habit of mine to use the word “producer” in that term.
If you click REPLIED ON next to my name on my post, it will show you who I was responding to. Just letting you know for future reference if you are unsure who is responding to which post. I was replying to Juan btw.
with a payroll tax and a sales tax you’re getting hit a lot.
once straight out of your paycheck
once out of the tax your employer pays on your paycheck instead of to you
once when you buy something
once because the price of the good is higher than it would be if producers were taxed less
now figure in inflation and you’re getting hit with a fifth tax
if you invest in a business you get hit with an additional tax for any dividends
how much does your dollar buy you at the end of this?
this is the “free market” that has “failed us”.
This is a basic macroeconomic principle, illustrated by a supply and demand graph.
S1 is the original supply curve. The examle assumes that the original equilibrium price for the product was $15, and the government imposes a $1 tax. That is represented by the $16. This model assumes equilibrium, but is simply used to establish a point. The tax shifts the supply curve to the left; the distance between S1 and S2 is $1. The new equilibrium is at $15.50, which shows that half of the tax was paid by the producer and the other half by the consumer. Therefore, the lesson is that government can tax whomever, but in the end it’s the market which decides who really pays that tax.
Supply and demand graphs are unsophisticated and cannot explain true tax incidence. The reason consumers are least affected by taxes is that they are not invested in the supply until they make their purchase. Suppliers are invested. Raising taxes does not change the equilibrium price of the existing supply, it makes it unprofitable to resupply to the current level. Capital that was invested to produce the current level of supply becomes worthless and is gradually shut down, leaving industrial rust belts as a consequence of the tax.
So yes consumers become poorer over the long run as a consequence of the tax, but it is not an expropriation for them, while it is an expropriation for suppliers. Consumers only become poorer because suppliers go out of business.
To expand, since the tax raises the price, it, thereby, prices-out some would-be buyers out of the market.
The only thing you’ve done is explain why the supply curve shifts to the left. You haven’t refuted the value of the supply and demand graph as a valuable tool for showing who really pays the tax. Of course, it’s not likely to be 50/50, because there wouldn’t be equilibrium, but it shows how tax does only cost the supplier. That’s its only purpose; it was not to accurately pinpoint who pays the tax, but to give a general picture.
The graph assumes a tax on the entire industry, not just certain businesses which form part of that industry. So yes, suppliers would go out of business, but that doesn’t mean that the consumer is also poorer because the consumer is paying more for the product, on average.
This is profound, but reflects what happens when tax rates change. When tax rates are static, inventories and entrepreneurs are adjusted to taxes. Producers add the fixed cost of taxes into their prices.
Right, a government tax doesn’t influence the demand curve, therefore the old price charged by producers is still profitable.
But isn’t this view based on the cost theory of prices? As Rothbard writes in his section on tax incidence in Chapter Four of Power and Market:
The first law of incidence can be laid down immediately, and it is a rather radical one: No tax can be shifted forward. In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer. Below, we shall see how this applies specifically to excise and sales taxes, which are commonly thought to be shifted forward. It is generally considered that any tax on production or sales increases the cost of production and therefore is passed on as an increase in price to the consumer. Prices, however, are never determined by costs of production, but rather the reverse is true. The price of a good is determined by its total stock in existence and the demand schedule for it on the market. But the demand schedule is not affected at all by the tax. The selling price is set by any firm at the maximum net revenue point, and any higher price, given the demand schedule, will simply decrease net revenue. A tax, therefore, cannot be passed on to the consumer. (p.1156)
If it were possible to raise prices when costs go up, then I could sell, e.g. a table, for a million dollars by building it really inefficiently and hence raising my costs. This is the kind of reductio that is used against the labor theory of value. If businessmen could raise prices, why do they have to wait for the tax to do so?
More Rothbard:
A general sales tax is the classic example of a tax on producers that is believed to be shifted forward. The government, let us say, imposes a 20-percent tax on all sales at retail. We shall assume that the tax can be equally well enforced in all branches of sales. To most people, it seems obvious that the business will simply add 20 percent to their selling prices and merely serve as unpaid collection agencies for the government. The problem is hardly that simple, however. In fact, as we have seen, there is no reason whatever to believe that prices can be raised at all. Prices are already at the point of maximum net revenue, the stock has not been decreased, and demand schedules have not changed. Therefore, prices cannot be increased. (p.1157)
Rothbard argues that sales taxes are shifted backwards to the owners of the original factors (land and labor):
In fact, this is precisely the effect of a general sales tax. Its immediate impact lowers the gross revenue of firms by the amount of the tax. In the long run, of course, firms cannot pay the tax, for their loss in gross revenue is imputed back to interest income by capitalists and to wages and rents earned by original factors—labor and ground land. A decrease in the gross revenue of retail firms is reflected back to a decreased demand for the products of all the higher-order firms. (p.1159)
Thus, Rothbard’s analysis and the mainstream analysis are similar in that the effects of a tax are the same: producers are hurt by increased costs and consumers are hurt by increased prices. However, for Rothbard the businessman cannot raise prices, but must accept lower profits; hence, marginal producers go out of business, and the reduced supply increases the price. As Murphy writes in the MES Study Guide:
Both the neoclassical and Austrian would agree that the equilibrium price of a radio could be higher after the imposition of a tax on sellers, and that (in a sense) consumers are bearing some of the tax burden. However, Rothbard emphasizes that the price rise is not “caused” by the tax, but rather the tax puts marginal sellers out of business, and then the marginal utility of the smaller supply of radios allows sellers to charge a higher price. The typical treatment of tax incidence subtly relies on a cost theory of prices. (p.214)
I’m not an economist, but from my albeit limited experience in the business world I would say this is a classic example of where academic theory and real world application diverge. Most private firms have set profit margins that they effectively “mark up” to product costs. They don’t go out and survey demand at a multitude of prices. For example, most retail stores are in the ballpark of the following benchmarks:
http://www.retailowner.com/Benchmarks50RetailSegments/tabid/55/Default.aspx
In my experience firms aren’t out there actively monitoring aggregate demand in effort to establish an equilibrium price, most seek the lowest cost possible to maximize volume (i.e. wally world)
