Reply To: Tax Shifting


Rothbard is responding to the mainstream literature on tax incidence. In that literature, incidence refers to who bears the burden of a tax, i.e., whose income is lowered when the tax transfers income to the state. With a general sales tax collected from the entrepreneurs, Rothbard shows that producers income is lowered not that of entrepreneurs or consumers. Entrepreneurs will not raise prices for output because, given preferences, they are already at their revenue maximizing levels. And entrepreneurs will not lower the interest rate (i.e., the spread between output prices and input prices) to the capitalist because, given time preference, its current level is necessary to clear the time market. After paying the tax, entrepreneurs have less revenue and thus, their demands for factors of production must fall and the prices of producers goods fall to maintain the interest rate.

Incidence, therefore, is only part of a larger analysis of the overall effects of taxation. The harm to consumers is not directly from the tax revenue transferred to the state but indirectly from the suppression of production that results from the tax.