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15 Tax Mag. 83 (1937)
Who Pays the Taxes

handle is hein.journals/taxtm15 and id is 83 raw text is: L YLE OWEN of Carnegie Institute of Technology answers an important question as to Who Pays the Taxes? T HE rapidly mounting cost of government, with its accompanying increase in the proportion of the national income absorbed by taxes, has made the Citizens of our republic inquire more than ever, Who pays these taxes? The question of who bears the burden is not simply a matter of who pays taxes in the first instance, but even more, it is concerned with who bears them in the end. It thus becomes of prime importance that the economic forces de- termining what economists call shifting, or the passing on to others of the tax burden, be under- stood. Some people assume that no taxes are shifted, or talk as if they believed this, when they complain of their tax bills. On the other hand, the opposite and equally erroneous assumption is frequently made that all taxes are shifted. A specific form which this second fallacy takes is that the rich can- not be made to bear taxes, because they will always shift the burden to others-chiefly to laborers or consumers. In the last congressional campaign a United States Senator speaking in a middle western city made a statement which embodies this widely held view. He said, in effect, that it does no good to levy taxes upon the rich, for they merely add these taxes into the prices of what they sell, and the great body of the poor and middle class citizens, because they are consumers, have to pay the taxes indirectly. The Senator's remark was made in criticism of the Roosevelt administration's policy of collecting a large part of the cost of unemploy- ment relief, as well as of other New Deal expenses, from those who are more than well to do-that is, from the rich and near rich. The theory of taxation implied in the Senator's statement is widely held, but like many other widely held beliefs, is only half true. It might be called a pessimistic theory of taxation-pessimistic from the standpoint of the great masses of the people-for it holds that no matter where taxes are levied in the first place, ultimately the consumer pays them, and that means for the most part the poor and middle classes. This belief ignores.the rules of the shifting of taxes, and therein lies its fallacy. When economists speak of the shifting of taxes, they mean the passing of the burden of a tax from one person to another. If a tax of two cents a gallon is levied on the gasoline produced by refineries, it is generally expected that the tax will be added by the. refiner to his selling price, and ultimately will be paid by the automobile owner when he purchases gasoline. The tax, though imposed initially upon the refiner or im- porter, is said to be shifted to the ultimate con- sumer of gasoline, the auto owner. Another example: The federal government imposes a tax of six cents a package upon cigarettes. This tax is levied upon the manufacturer, and he pays the money to the government. But in turn the manu- facturer ordinarily is able to add this tax into the selling price of the cigarettes, and the smoker pays that much more for a package than if there were no tax. In other words, the manufacturer in this case is able to shift the tax. But suppose that the gasoline refiner or the tobacco manufacturer were unable to add the tax into his selling price. In such a case the tax is said not to be shifted. It is obvious that the question of the shifting of taxes is of the greatest, importance. On whom the burden rests finally is more important than from whom the tax is collected. Too often legislators overlook this fact, carelessly imposing taxes with- out inquiring whether they will be shifted, so that an entirely different set of people may be called upon to pay them than the ones who make the first money payment to the government. Some taxes, then, are shifted, and others are not. What are the economic principles determining whether in a given case shifting will take place? The principles are complex and the exceptions many, but the fundamentals may be stated briefly. In the first place, whether a tax is shifted is not a question of the desire of the one taxed to be rid of the burden. That desire can be assumed; when one can shift a tax, he will. The real question is not whether the fact that the government has levied a tax on me makes me want to pass the burden on to some one else; the real question is whether the imposing of such a tax gives me the power to raise the price of what I sell, where I did not have that power before. If it does give me such power, then the tax is a shiftable one. Whether or not a tax can be shifted is therefore not a matter of desire but of economic laws. There are various ways in which the subject of shifting may be approached, but perhaps the simplest is from the standpoint of the effect of taxation upon demand and supply. Prices-by this is meant all kinds of prices, including not only commodity prices, but rent, interest, and wages-result from the interaction of demand and supply. That is, a

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