Who Bears the Tax Burden? T. Hultman

Todd S. Hultman ,... .. ~ ~.~ t~~~4l~~~f(ij "!I-~ ..... Who Bears the Tax Burden? ONE of the least understood concepts in economics concerns the effects of the corporate income tax. Many say the burden of this tax falls totally on the shoulders of the corporations since they actually "pay" the tax. Others see this as a consumer tax since everything the corporation earns comes ultimately from the consumer. While both statements may be partially true, neither gives the complete picture. To gain a bet ter understanding of the effects of such a tax, consider the following example: The small island country of Koala boasts a relatively free market, pri vate property order. There are five corporations on the island which grow and sell pineapples. Assuming Mr. Hultman assisted with the 1981 Summer Seminar program at FEE. He is a senior at the University of Nebraska at Omaha. all pineapples to be similar, these businesses, in conjunction with their customers, have settled on a price of $1.00 per pineapple. This price has not been determined by the costs of the pineapple growers, but has been discovered as the market-clearing point satisfactory to both sellers and buyers. It is the price at which sup ply equals demand.

Now suppose the government of Koala imposes a $.50 per pineapple tax on these corporations. Some claim that since the tax is charged to these businesses, they bear the cost. Oth ers argue that since everything these businesses earn ultimately comes from the consumers, the consumers bear the full burden of this tax. Who is right? Assume the former are right and the sellers still charge only $1.00 per pineapple. Since the tax has 753 754 THE FREEMAN driven up costs, thus reducing and possibly eliminating their profits, some firms must close or move to more profitable areas. This reduc tion in the number of sellers results in higher prices for buyers since the supply of pineapples has dimin ished. Thus, consumers bear at least some of the cost of this tax. Now suppose the latter argument is correct. This means that the busi nesses would charge $1.50 and re main unaffected by the tax. How ever, many buyers leave the market at this price, deciding they would rather do without pineapples or grow their own. If this weren't so, sellers long ago would have raised their prices to $1.50.

As buyers leave, the sellers' reve nues fall. Sellers soon find they are better off bearing part of the tax burden by allowing prices to fall in order to retain more customers. The fact that all sellers have raised prices doesn't mean they have been pro tected from the effects of the tax: some buyers still leave the market. Liberty and Taxes Because of this tax, the resulting price will be somewhere between $1.00 and $1.50. Depending on the nature of the market, the buyer will bear part by paying more than $1.00 and the seller will bear part by re ceiving less than $1.50. Buyers who can't afford the higher price and sellers who can't afford the cut in income will be forced out of the mar ket. Those who view the corporate tax as either a tax on business or a tax on consumers are right in part, but fail to grasp the entire picture. Be cause of the high degree of interde pendence in the developed market place, no governmental act can affect just one group: the well-being of one depends on the continued well-being of all others. Thus, the corporate tax doesn't fall exclusively on busi nesses or consumers, but on all those who wish to cooperate peacefully for their mutual benefit. Rather than being a tax on a specific group of people, this disruption of peaceful exchange is a tax on cooperation. i IDEAS ON LlBERT'THE VOTERS of one period should not tax those of a later period.·Those of the later period are not represented in the instant taxing body, and hence today's taxation of the citizens of tomorrow distinctly violates the principle of taxation by representation of those who pay the taxes. This means that to increase .its expenditures government should not incur debt, because the burden of its redemption is thereby imposed on future taxpayers.

BRADFORDB. SMITH A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Is PublicEducation Necessary? As EDMUND OPITZ has said, where we once had public (State-con nected) churches and private schools, the situation is now completely re versed. Whether the public schools are engaged in imposing a new faith, that of secular humanism, on an un suspecting populace is a matter of much discussion. Such an imposi tion is surely happening in some places. But families and churches will combat it. The greater danger in public education is that State supported schools must fail to give anti-Statist philosophies (in eco nomics and political science) an even break. Who, in a public school, would recommend Hilaire Belloc's The Servile State as alternative reading in a course? I wouldn't hope for any thing better than a clash of opinion about Statism in a public school class, but I'm still waitingto see it. Leonard Read once said that the struggle to separate school and State should be high on the libertarian agenda of the future. The recent up surge in private schools is an indi cation the battle is already on. But declining scores on Scholastic Apti tude Tests (SAT) have had more to do with the change than any in crease in philosophical understand ing. We have been waiting for a long time for a book that would correctly assess the totalitarian potential in a universal "free" (i.e., tax-supported) public school system that relies on compulsion to recruit its students.