> What wicked web we weave when at first... Kind of like the circle that
> follows from the argument that corporations just pass taxes on to consumers.
> If that were true it would imply firms are price makers and not takers. But
> if that is the case then there is prima facie case for taxing monopoly
> profits. If not then the original proposition is wrong because firms cant
> pass along taxes to consumers.
Yes, that is contradictory. But I believe the argument, based on the standard theory of tax incidence, is the exact opposite: that corporations can't shift the tax burden to workers or consumers. So the stockholders' income is taxed twice.
At least that was Harberger's conclusion in his 1962 paper, still in high regard. And Harberger showed that the conclusion was virtually unaltered when a monopoly markup for the corporate sector was included in the model.
Michael Smith wrote:
> Speaking as a complete economic naif here -- isn't this a matter
> of short-term vs. long-term? Long-term, taxes and other costs
> of doing business get passed on to customers or employees
> or both.
Harberger's model is long term and of the general equilibrium type. In that context (all markets being interdependent), the issue is whether a tax ends up raising prices, lowering wages or lowering the returns on other productive inputs, and whether those repercussions ripple far from where the tax is directly assessed.
The short answer is that it depends on the respective elasticities of supply and demand in each market. For a given period of time, if the market demand is flat (highly elastic), the taxed suppliers can't increase the price. If a firm can more easily substitute between inputs, then it can shift the burden to its workers. But the corporate sector is more rigidly capital intensive. And even monopolies face an elastic demand. (Conveniently, Harberger assumes full employment. With unemployment, workers need for jobs would be more rigid.)
It's like in life or politics, if you have more options in the short run, can materially afford to be tougher in a negotiation, and have more bargaining power. Ultimately, you can walk away. The other party may depend on you, but you don't depend on the other party. It boils down to that.