Reply To: Tax Shifting


Thanks for the quick response! Okay, so I think where I’m confused is when Rothbard brings up the discussion of a decreased supply increasing prices. Rothbard uses this point to argue that taxes cannot be passed forward, period, because a decreased supply means firms are going out of business, and if they’re hurt in such a way, this can’t truly be a case of passing on the tax to consumers.

Two questions:
1) Is this decrease in supply a special case within possible general sales tax scenarios, or does this occur every time a general sales tax is implemented (i.e. as demand for factors is lowered due to the tax, does supply necessarily decrease, and prices necessarily rise)?
2) If Rothbard’s point is that firms going out of business means that they cannot shift taxes forward, why cannot the same argument be used to say that they cannot shift taxes backward? Is this argument by Rothbard simply besides the point? I follow his process of reasoning how firms being taxed lower their demand for factors and derived demand in higher stages of production are thus lowered until the original factors receive lower incomes. So maybe that particular argument is just a bad one? If firms are going out of business, they’re going out of business, regardless of who the tax was really passed on to.

The only way I can square that particular argument with Rothbard’s line of reasoning is if firms being taxed do not go out of business as they pass on the tax backwards. Does that make sense?