CHAPTER XLVII

THE SHIFTING OF TAXES1

One of the first lessons that the student of taxation learns is that the payer of a tax sometimes shifts the burden in whole or in part onto someone else, thus relieving himself, in part at least, of the burden. This can come about only in the process of buying and selling. The person taxed, in other words, has no means of persuading anyone else, as a favor to himself, to assume the burden; he can only charge a higher price for what he has to sell, or pay a lower price for what he buys, thus recouping himself for what he has paid in the form of a tax. But this matter of raising the price of what one has to sell or depressing the price of what one has to buy is something which is not so easily done as said, as anyone can convince himself by trying it. The buyer of what one has to sell and the seller of what one has to buy will have something to say about it. Unless the tax affects the general conditions of the market in a way which favors the payer of it, he will not be able to sell at a higher or buy at a lower price, in other words, he will not be able to shift the tax. The shifting of a tax is the process by which the payer recoups himselffor gets from some buyer of his product or service, or from some seller of what he buys, a sum which will partly or wholly cover what he pays in the form of a tax. The one who finally bears the burden is said to bear the incidence of the tax, or the incidence is said to be upon him. In the present state of economic knowledge it is scarcely worth while to attempt the task of locating the final incidence of all kinds of taxes. When the payer of a tax shifts it upon someone else it is not at all

1 The substance of this chapter is published in the Yale Review for November, 1896.

improbable that that person will, in turn, shift it onto a third, and so on. When the process of shifting a tax is once started, it is not easy to tell when or where it will stop or who will bear the final incidence. That such knowledge is greatly to be desired goes without saying. It is a truism that equity in taxation consists in distributing the burdens equitably; but how can this be done, even in theory, unless we know where the burden will rest? As a step in the process of finding out where the incidence will rest, we may begin by examining the conditions which will permit a tax to be shifted.

A tax is shifted only when it affects final values and prices so as to enable the taxpayer1 to reimburse himself for the tax at the expense of someone else The shifting of taxes forms a special class under the general phenomena of value and must therefore be brought under the general law of value and price. The first question to arise is, Under what conditions will a tax affect the value of the thing taxed; or, in other words, bring about such a change in the market and such a modification of values as to furnish the taxpayer an opportunity to shift the burden upon someone else?

A tax is no exception to the general law that nothing can change the relative value of an article without first changing the relation between demand and supply. In order to raise the price of anything a tax must either increase the demand or reduce the supply, and to reduce the price it must either decrease the demand or increase the supply. A failure to appreciate fully the universality and persistency of the law of demand and supply lies at the basis of much incorrect thinking on the subject of the shifting of taxes. There is a more or less general opinion that the value of anything is determined directly by

1 For convenience the following terminology is adopted: The taxpayer is the one who pays the tax in the first place, or the one from whom the tax collector receives it. The bearer of the tax is the one upon whom the burden finally rests. The thing taxed is that upon which the taxpayer's tax is rated, or according to which it is estimated. This seems to be in accord with Professor Seligman's idea as set forth in the Political Science Quarterly, Vol. VII, p. 715, and also in his "Essays in Taxation," p. 395.

2 See Marshall's "Principles of Economics" (third edition), p. 519.

what it costs, and that as a tax adds to the cost it must therefore be added to the price. This overlooks the true relation of cost to value. The cost of anything affects its value only when it puts a check upon production and limits the supply.' Whenever an addition to the cost will cause a decrease in the supply or an increase in the demand, it will raise the value of the article in question. But this will not occur in every case. It is scarcely conceivable that a tax can increase the demand for the thing taxed. If it ever does so, the instances must be so rare that we can safely ignore them. This leaves us to the conclusion that a tax can raise the price of the thing taxed only when it occasions a diminution in the supply.

Under what conditions will a tax cause a diminution in the supply of the thing on which it is levied? Whenever it will make the production of any part of the existing supply a source of loss to the producer at the existing price. The supply of different commodities is determined by wholly different factors. In order to arrive at definite conclusions as to the effect of taxation upon the supply of different taxable things, it will be necessary to adopt the following classification:

Persons and incomes belong in a class by themselves, since they are not commodities. If a capitation tax is shifted at all, it must be by affecting the price of some commodity which is

1 Cf. Chapter XXV, What determines the Value of a Thing.

2 But it may increase the demand for some other commodity by inducing people to substitute it for the thing taxed. There are, however, many general and indefinite social effects of taxation which need not be discussed under the shifting of taxes, since they do not give the taxpayer any special opportunity nor any special advantage over the other members of the community.

inseparately connected with personality. In other words, such taxes cannot be shifted unless they either increase the price of labor or decrease the price of the necessaries of life.

It is difficult to see how a general income tax could be shifted at all, unless it were made heavy enough to decrease saving and reduce the rate of accumulation. A moderate income tax could not make the possession of an income undesirable, and if it applied proportionally to all incomes it could not drive men from one industry to another. If, however, it applies only to a special class of incomes, or to those derived from certain special sources, it might drive some men out of certain occupations. Wherever this results, the diminished competition will enable those who remain in these occupations to earn more and thus reimburse themselves, in part at least, for the tax. When, however, as indicated above, an income tax becomes excessive, or when it is so heavily graduated as to reduce materially the free incomes of the classes who do most of the saving and investing, it is pretty certain to be shifted, in part at least, in the form of a higher rate of interest. The reason is simple. Those who ordinarily do the saving and investing must, of course, do it by consuming only a part of their incomes and investing the rest. If their total incomes are greatly reduced by a heavy income tax, they must invest less, consume less, or both. If they invest less the slower rate of accumulation will make it more difficult for new enterprises to secure adequate capital. The competition among these enterprises for the limited amount of capital will invariably raise the rate of interest. Enterprises that formerly secured all the capital they needed at 5 or 6 per cent are likely to have to pay 7 or 8 per cent, or even more. Our present heavy income taxes (1921) undoubtedly have something to do with high rates of interest. The only possible way to prevent a scarcity of investment capital and a consequent rise in the rate of interest is for other classes to become large savers in the aggregate, thus supplying the investment funds cut off from former sources by the graduated income tax.

A capitation tax necessarily bears most heavily upon the poorer classes and may, under certain conditions, enable these classes to earn more and thus escape a part of its burden. For example, if a certain local community should levy a heavy capitation tax it might drive a certain number of the laborers elsewhere. If the industries of the place were localized the scarcity of labor would enable the remaining laborers to earn better wages. But the wider the area over which the tax is levied, the more difficult it will be to shift it. What the effect of capitation or income taxes will be upon the price of the necessaries of life will depend on the use that is made of the money that is collected. The probability of such taxes' being shifted by causing a reduction in the cost of living seems too remote to call for a detailed discussion here.

Since land and natural agencies are not the products of industry, the only way of reducing the supply of these things is by causing the abandonment of some portion which is already in use or by preventing the appropriation of some portion that would otherwise be used. A tax of less than 100 per cent of the rental value could do neither of these things. Since rent is a pure surplus, no individual owner could have any reason for abandoning his property so long as the tax collector leaves him any part of this surplus. Since such a tax would make no difference in the amount of land cultivated, and would not change the factors which determine the intensity of cultivation, it could not affect the price of the products of the land nor raise its rent. From the standpoint of the tenant a given piece of land would be neither more nor less desirable on account of the tax; the landlord could collect neither more nor less rent and would have to bear the burden of the tax.

But, on the other hand, the fact that the landlord must bear the tax makes land a less desirable kind of property to own after the tax is levied than before. This will so diminish the demand for land as property as to reduce its selling value and enable the future purchaser to shift the future taxes upon the present owner. In other words, the latter must bear the