The Incidence of Taxation

Asimakopulos, A.
March 1979
Challenge (05775132);Mar/Apr79, Vol. 22 Issue 1, p47
The incidence of taxation has long held a fascination for economists. It has been recognized for some time that the economic incidence of a tax might differ from its legal incidence. There are, however, important differences among economists about the economic incidence of other taxes: the incidence of the corporate profits tax has been a matter of particular controversy. These differences are to he found even among proponents of neoclassical economic theory who, in their analyses, assume full employment and then try to deduce the incidence of a profits tax from a microeconomic perspective alone. The prices at which the firms sell their output and their costs of production are all given independently of the tax. In this situation, the initial burden of a profits tax must fall on the earnings of firms, since they have no scope, under the competitive conditions assumed, for increasing their pre-tax profits. The post-Keynesian approach to tax incidence differs fundamentally from both variants of neo- classical theory because it does not assume that the macroeconomic effects of a broad-based tax, such as a profits tax, can be ignored. A higher profits tax, even if the government maintains a balanced budget by spending the extra revenue it obtains, would affect aggregate demand and thus alter pre-tax profits.


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