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Thursday, April 10, 2008

Who Bears The Burden Of A Sales Tax

Kevin Bjornson wrote:

KB) all taxes are paid by consumers in a normal business environment. The costs must be and are passed on to consumers. (KB

No, tax incidence depends quite uncontroversially on elasticities of supply and demand, and falls on those most sensitive to changes in price.  A tax on cigarettes falls on consumers; a tax on candy bars falls on producers; the employer's part of the payroll tax actually falls on the employees.  For details, see  Other crucial concepts include producer surplus, consumer surplus, and deadweight loss.

Cursory searches suggests that the topic of tax incidence doesn't seem to be covered in the old libertarian standard, Hazlitt's Economics In One Lesson, nor in my current favorite economics overview, Fred Foldvary's Science of Economics.  I'm cc'ing Fred in case he can recommend a text to supplement his, or -- more generally -- what one or two books he would recommend someone should read to have a rudimentary grasp on the economics of public policy.   My default choice for another source would be either a macroeconomics textbook like Mankiw's (even though it makes the standard mistake of conflating land and capital), or the Concise Encycopedia of Economics available online from the indispensible Library of Economics and Liberty.