Page 667 - Economics

CONFIRMING PAGES

PART EIGHT
576
Microeconomics of Government
bottles. It may have concluded that such consumption There simply is no consensus among experts on the
of alcoholic beverages produces certain negative ex- overall incidence of the corporate income tax. Stockholders,
ternalities. Therefore, it might have purposely levied customers, and resource suppliers may share the tax bur-
this tax to shift the market supply curve such that the den in some unknown proportions.
price of wine increased and the amount of resources
allocated to wine declined (as in Figure 29.3b ). (Key Sales and Excise Taxes A sales tax is a general ex-
Question 9) cise tax levied on a full range of consumer goods and ser-
vices, whereas a specific excise tax is one levied only on a
particular product. Sales taxes are usually transparent to
Probable Incidence of U.S. Taxes the buyer, whereas excise taxes are often “hidden” in the
Let’s look now at the probable incidence of each of the price of the product. Sellers often shift both taxes partly or
major sources of tax revenue in the United States. largely to consumers through higher product prices.
There may be some difference in the extent to which sales
Personal Income Tax The incidence of the per- taxes and excise taxes are shifted, however. Because a sales
sonal income tax generally is on the individual, because tax covers a much wider range of products than an excise
there is little chance for shifting it. But there might be tax, there is little chance for consumers to resist the price
exceptions. Individuals and groups who can control boosts that sales taxes entail. They cannot reallocate their
the price of their labor services may be able to shift a part expenditures to untaxed, lower-priced products. There-
of the tax. Doctors, dentists, lawyers, and other profes- fore, sales taxes tend to be shifted from producers in their
sional people who can readily increase their fees may do entirety to consumers.
so because of the tax. Unions might regard personal in- Excise taxes, however, fall on a select list of goods.
come taxes as part of the cost of living and, as a result, Therefore, the possibility of consumers turning to substi-
strengthen their bargaining resolve for higher wages tute goods and services is greater. An excise tax on theater
when personal income tax rates rise. If they are successful, tickets that does not apply to other types of entertainment
they may shift part of the tax from workers to employers, might be difficult to pass on to consumers via price in-
who, by increasing prices, shift the wage increase to the creases. Why? The answer is provided in Figure 29.3a ,
public. Generally, however, the individual on whom the where demand is elastic. A price boost to cover the excise
tax is initially levied bears the burden of the personal in- tax on theater tickets might cause consumers to substitute
come tax. The same ordinarily holds true for payroll and alternative types of entertainment. The higher price would
inheritance taxes. reduce sales so much that a seller would be better off to
bear all, or a large portion of, the excise tax.
Corporate Income Tax The incidence of the cor- With other products, modest price increases to cover
porate income tax is much less certain. The traditional taxes may have smaller effects on sales. The excise taxes on
view is that a firm currently charging the profit-maximiz- gasoline, cigarettes, and alcoholic beverages provide ex-
ing price and producing the profit-maximizing output will amples. Here consumers have few good substitute prod-
have no reason to change price or output when a tax on ucts to which they can turn as prices rise. For these goods,
corporate income (profit) is imposed. The price and out- the seller is better able to shift nearly all the excise tax to
put combination yielding the greatest profit before the tax consumers. Example: Prices of cigarettes have gone up
will still yield the greatest profit after a fixed percentage of nearly in lockstep with the recent, substantial increases in
the firm’s profit is taken away via an income tax. In this excise taxes on cigarettes.
view, the company’s stockholders (owners) must bear the As indicated in Global Perspective 29.1, the United
burden of the tax through lower dividends or a smaller States depends less on sales and excise taxes for tax reve-
amount of retained earnings. nue than do several other nations.
However, economists recognize that where a small
number of firms control a market, producers may be able Property Taxes Many property taxes are borne by
to shift part of their corporate income tax to consumers the property owner, because there is no other party to
through higher prices and to resource suppliers through whom they can be shifted. This is typically true for taxes
lower prices and wages. That is, some firms may be able to on land, personal property, and owner-occupied resi-
use their monopoly power as sellers and monopsony power dences. Even when land is sold, the property tax is not
as buyers to reduce the actual amount of the tax paid by likely to be shifted. The buyer will understand that future
their corporate stockholders. taxes will have to be paid on it, and this expected taxation

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