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APPENDIX B OPINIONS ON IMMEDIATE SHIFTING OF RETAIL SALES TAXES a) G. Colm, and H. Tarasov, Who Pays the Taxes? T.N.E.C. Monograph, #3, 1941, p. 25. "But (retail) sales taxes need not always be passed on to the consumer; they may be, in reality, absorbed by the seller (or passed backward to the producer) who, if compelled by law to charge the consumer for the tax, may simultaneously lower his price." b) J.F. Due, The Theory of Incidence of Sales Taxation, 1942, pp. 162-163. "The initial reaction (to a retail sales tax) of retail firms, operating inevitably in conditions of monopolistic competition, although with widely varying strength of the monopoly elements, will be to raise prices at least by the full amount of the tax, either by adding the tax to the regular price as a separate charge, or by readjusting markup to include this additional cost item . . . Laws requiring separate charging are of considerable significance because they serve to strengthen forces leading to uniform action which is essential to immediate full increase . . . Where retail prices are set by manufacturers, or by law, there is even more certainty that the entire tax plus, ordinarily, some additional amount for higher cost of operation per unit, will be shifted immediately." c) M. Groves, Financing Government, 1939, p. 148. "(Retail) sales taxes probably rest on the consumer, but there are exceptions to this rule. Where the demand is highly sensitive, merchants may bear the tax rather than raise prices, particularly if the tax is small. An objection to the sales tax is sometimes raised on the ground that the consumer bears the burden only in the case of the necessities of life for which the demand is inelastic; while in the case of a tax on luxuries, which is more justifiable borne by the consumer, the merchant will absorb the tax rather than los his trade." d) N. H. Jacoby, Retail Sales Taxation, 1938, p.. 313-316. "In the actual world, affairs are somewhat different, especially over short periods of time. In the field of retail merchandising competition is sluggish or only partial. Not are consumers wholly rational in their choices and reactions. They act partly from habit or prejudice. Discriminating self interest does not assert itself until some time subsequent to imposition of a sales tax, and in the interim legal requirements concerning shifting do to some degree, determine where the burden falls. Other elements of 'friction' in the economic system resisting adjustment ar the 'sticky' prices. Many articles are sold nationally in 'standard' packages or quantities or at prices fixed by contract with manufacturers. Where these arrangements prevail, retailers of individual states are unable, at least in the short run, to alter them. Still other prices are fixed by public authority, such as those for public utility services and school textbooks. Retailers are then able to recover a sales tax only by adding the tax as a separate item, and sometimes contracts prevent this practice. "In addition, individual retailers come to have a partial monopoly of trade through location, advertising, or other factors that make them preferred over other merchants. Consumers trade with them for a time through habit even though they may charge more 'tax' or have higher prices than competitors, because of some real or fancied gain in merchandise, prestige or service. The particular methods and amounts of tax collections prescribed by the state for use by these retailers temporarily determines the amount of the tax burden borne by consumers, pending the development of keener (more rational) buying habits. "The existence of 'psychological buying prices,' such as nineteen cents, ninety-eight cents, or $1.19, all possessing special attraction for buyers, is another cause of departure from the conditions of pure competition. Readjustment of such prices to added costs is not made merely by adding these costs, but by advancing prices to the next 'buying price.' To illustrate, a retailer desiring to mark up an article A priced at ninety-eight cents prior to imposition of a two-percent tax might not raise it to one dollar but to $1.19. "If a sufficiently long period of time be considered, the influence of all these 'frictional' elements can be disregarded. OVER A SHORT PERIOD, promulgation of an official schedule of price additions on account of a sales tax, with the attendant publicity and prestige of executive authority, may result in a substantially complete shifting of the tax in the strict economic sense from retailers to consumers. Conversely, legal prohibition against adding 'tax' to prices may in the short run prevent shifting to an important degree. If a temporary sales tax is imposed at a low rate, it is conceivable that strong legal mandates are able largely to determine its incidence throughout its life. Through time only can costs be accurately computed, sales trends known, prices readjusted on account of additional tax costs, and a true, stable apportionment of the tax burden evolved. Legal and administrative provisions normally have but a transient effect and are of primary importance in solving political problems incidental to putting sales taxes into operation, by lending outward uniformity." - 2 - OPINIONS ON ULTIMATE INCIDENCE OF RETAIL SALES TAXES a) A.G. Buehler, General Sales Taxation, 1942, p. 186. "The possibility of shifting a tax on the sales of commodities depends largely on the elasticity of demand for articles which are indirectly affected by the tax. It is a general rule in incidence theory, that the case of tax shifting varied with the degree of elasticity of demand. The more inelastic demand for taxed commodities and service is, the more easily the tax can be shifted; and the less inelastic the demand for commodities and service is, the more difficult it is to collect a tax from consumers." b) A. G. hart, "Consumption Taxation as an Instrument of Economic Control", Law and Contemporary Problems, Vol. VIII, #3, Summer 1941, pp. 458-459. "Consumption taxes immediately payable by sellers (as all actual consumption taxes are) drive a wedge between the price of consumer goods as paid by the consumer and the price as realized (net of tax) by the seller. Accordingly, the effect of such taxes in themselves -- that is, assuming government expenditures and other tax rates would be the same whether or not these taxes were levied -- is to discourage production of consumer goods. For if prices to consumers rise, a given amount of consumers' money outlay will buy fewer goods. But if prices to consumers do not rise, the prices realized by sellers will fall by the amount of tax, reducing incentives to produce. Prices to consumers can remain unchanged only if producers get costs reduced sufficiently to offset the tax; but his implies reducing wage rates and farm prices and thus reducing spending power, so that even at unchanged prices consumers can buy less." c) Carl S. Shoup, The Sales Tax in France, 1930, pp. 325-326. "If the article be a necessity such as salt, the consumption of which is little affected by price, the producers can add practically the total amount of the tax plus whatever incidental expenses the tax brings to them, and selling the same unit amount as before, maintain the same total profits as before. In such a case conditions of production are of little consequence. The same might be said of certain very expensive luxuries available only to a select clientele who do not care, if indeed they know, how much they spend upon them. But if the article be one the consumption of which is powerfully influenced by price -- automobiles, for example -- then the sellers find that they can not dispose of their former marginal units at the old price plus tax, and must restrict their production until the more powerful Marginal purchasers ar reached and equilibrium is once more established at a somewhat higher price per unit, but with smaller gross sales (ex-tax) than before. If operating under decreasing returns, the industries making the commodity would not have to advance the price per unit by quite as much as the tax per unit, owing to lower operating costs on the new marginal units; if under constant returns, the increase per unit would be equal to the tax; if under increasing returns, the increase would be more than the tax, to compensate for the added average expense per unit of production on a smaller producing schedule." - 3 - OPINIONS ON IMMEDIATE SHIFTING OF SALES TAX OTHER THAN ON RETAIL SALES a) Buehler, op. cit., pp. 186-187. "The possibilities of (sales) tax shifting are conditioned, furthermore, by general business conditions. In the prosperity phase of the business cycle, when prices are consistently rising, due to fundamental disturbances in currency and other factors, a general sales tax may be added to prices with little difficulty. But during the recession phase of the business cycle, when prices are consistently falling and markets are glutted with goods that cannot be sold, past production costs may be sunk without possibility of recovery, and it may be impossible to collect any part of a general sales tax from consumers." b) National Industrial Conference Board, General Sales of Turnover Taxation, 1929, pp. 53-54. "Three temporary effect of the levy of a general sales or turnover tax should be noted. First, the reduction of consumers' demand for luxuries and non-essential which would result from the levy of a general sales or turnover tax might be met by a price reduction on the part of the producers and distributors, in the hope of retaining their markets. Until the supply of the affected articles readjusted itself to the changed demand, these producers and distributors would suffer reduced profits and possibly outright losses. Second, a general sales or turnover tax levied during a period of general depression, with demand dull and prices perhaps declining, could not be added by producers and dealers to their prices without further reducing their sales; temporarily, therefore, the tax would fall on the producers and dealers. Conversely, a turnover tax levied during a boom period might cause producers and dealers for a time to add somewhat more than the tax to their prices. Third, the prices of articles marketed at low standard prices might not be affected by a general sales or turnover tax if its rate was low, since a small fractional tax could not be conveniently added to the price, and since any change in the price would sacrifice market good-will." c) G. F. Shirras, The Science of Public Finance, 1936, p. 614. "If sales taxes are not shifted, as the sellers may prefer to absorb the tax specially if it is not severe, rather than to interfere with customary prices, the tax remains with business as a charge on sales. If the tax is shifted, sales may decline and readjustments and supplies may be necessary. The shifting would depend upon the nature of the demand and other factors contributing to its price. In times of falling prices there is a decided tendency for producers or dealers to absorb the tax. If it is not shifted, it is therefore paid out of producers' or dealers' profits and its burden varies from industry to industry. If an industry or business works on a small profit, even a moderate sales tax would have a decided effect in comparison with a slower turnover and a higher rate of profit on that turnover. The concern which is organized by vertical combination would have to add a small amount to its price in comparison with firms in other types of industry . . . ." - 4 - OPINIONS ON THE ULTIMATE INCIDENCE OF SALES TAXES OTHER THAN ON RETAIL SALES a) H.G. Brown, "The Incidence of a General Output or a General Sales Tax", Journal of Political Economy, 1939, Vol. 47, p. 255. "There is no obvious connection between a general tax on the output of goods and an increase of the volume of circulating medium. There is, therefore, no basis in monetary theory for supposing that a general tax on all goods will make average prices permanently higher. To raise the general level of prices there must be either a decrease of supply of goods in general or an increase of demand (as through an increased volume of money). If a tax on the output of all goods neither decreases supply nor increases demand, on what basis is it to be argued that such a tax will raise prices? If a tax on all goods does not raise prices, it must lower the money incomes of (the number of dollars received by) workers, capitalists, and landowners." b) Buehler, OP. CIT., New York, 1932, p. 188. "As a general long run proposition this tax tends to be shifted to the ultimate consumers; but the complete shifting of the tax is retarded by various resisting factors, including immobility of investments, elasticity of demand, unfavorable business conditions, the exclusive character of the tax, etc. A general sales tax affects the processes of production and consumption directly and indirectly, with reference to both taxed and non-taxed articles, for the production and consumption of various articles are related. Consumers suffer from curtailed purchasing power as a result of the tax, while sellers suffer from a lessened volume of sales. Particular prices of taxed and non-taxed articles are affected in various ways, but the general level of prices tends to remain unchanged because of the counteracting forces at work." c) Due, OP. CIT., pp. 115, 195. "(Gross sales taxes) fall in the main partly on consumers, to the extent that the total output falls, and partly on capital owners, to the degree that interest rates are reduced. The workers as such especially certain groups thereof, and monopoly profit receivers, may likewise share the burden. Because of the shifts which occur in demand, the relative burdens on consumers of individual products will be different than that which would be indicated in the analysis of a tax on such commodities considered individually." "The (sales) taxes on the firms in the various stages of physical production and distribution involve cost increases, and will result in increases in sale prices at each step. The latter culminate in increased purchase prices as well as higher operating costs for the retailer. The prices of the latter will, in general, be raised so as to pass on these two burdens to the consumers. The final increase depends, of course, in part upon the cost conditions in the various stages, and in part on the nature of competition . . . Only in case of increasing cost conditions, and in some cases of excess profits, will part of the tax remain on groups engaged in production." d) C. J. Hyning, Taxation of Corporate Enterprise, T.N.E.C. Monograph No. 9, 1941, p. 107. "The effect (of a sales tax) on industrial activity depends on whether the tax is passed on to the consumer and in what form (lower quality, lesser quantity, higher price) or absorbed by the manufacturer or trader, or passed back as lower prices for labor or raw materials, as may be caused if a product is subject to elastic demand and if its producer has a strong position vis-a-vis his employees or his supplier. A shift in sales volume may affect business costs adversely; particularly if fixed costs are large, the decrease in . . . taxes resulting from a decline in sales may never compensate for the lower turn-over. Contrariwise, the higher . . . taxes on increasing sales may not be a deterrent, since the margin increases with volume. Nor will industry with high variable costs be discouraged from expanding by commodity or sales taxes, but it will have to regard them as a basic cost factor when it sets prices. For the fixed-cost industry, (sales) taxes are a secondary factor in price policy, since it must first of all seek volume, and if demand is elastic, it may be preferable to absorb at least some of the commodity and sales taxes for the same of expanding the market. How each industry treats these variable taxes depends on its own peculiar cost and competitive conditions." e) National Industrial Conference Board, OP. CIT., p. 52. "The conditions governing the supply of and the demand for manufactured commodities and their price point to the conclusion that a general sales or turnover tax exactly proportioned to the retail prices of taxed commodities and services would raise the prices paid by consumers, though not necessarily by the exact amount of the tax. The uneven effect of the tax on prices would result, not from any peculiar circumstance of the general sales or turnover tax, but because the resulting reduction of consumers' purchasing power would lead to a diminished demand for luxuries and non-essentials. The shrinkage of supply that would follow would affect the prices at which these articles and services could be placed on the market, according to the circumstances of their production - that is, whether they were produced at constant, increasing, or decreasing cost." f) National Industrial Conference Board - Sales Taxes: General, Selective, and Retail, 1932, pp. 36-38. ". . . Those producers or distributors who are operating at a loss or at the margin will in time become bankrupt, if they cannot add the tax to their costs and increase their prices sufficiently to realize a profit. The process of elimination of marginal producers in certain industries, however, will be slowed down by the substitution of other producers, who enter the business without experience, and also by the immobility of capital. With the marginal producers out of business, the supply of commodities is reduced, and this enables the more efficient producers remaining to charge higher prices. With a stronger demand and higher price, the tax can be included in costs and thus shifted to the consumer. Higher prices, however, usually mean that the consumers' purchasing power has been reduced, which will bring about a readjustment in family budgets, resulting in a larger proportion of income going to necessities and less to luxuries and savings." "In competitive industries, such as agriculture and mining in certain stages, where the per unit production costs increase as the output increases, a reduction in the output may cause the tax to fall in part on the producers . . . If the competitive industry is producing a commodity elastic in demand at a cost per unit that decreases as the output increases, the imposition of a sales tax cause the consumer to pay a price increased by an amount great than the sales tax . . . If the unit costs of production remain constant regardless of the volume of output, the producers must add the full amount of the tax to the costs and thus pass it on to the consumers in higher prices." "There is likely to be less shifting of a sales tax under monopolistic conditions than under competitive conditions, notwithstanding the popular opinion to the contrary. The monopolistic is able to determine the price, within limits, through the control of the supply of the commodity produced, and therefore cost is not a price determinant as in the case of competitive industry. By experiment the monopolist finds the price that will return the maximum net profit. If the monopolist attempts to increase his price on account of a newly imposed tax, this will affect his profit; if he does not change the price, he will have to absorb the entire tax, which will also reduce his profit. The procedure of the monopolist would be to experiment with price changes through adjustment of the supply, in order to find a price that would produce the maximum net profit under the new conditions. In the process of adjustment the monopolist may find that he will be compelled to sacrifice a portion of his profit, amounting to more than the tax or less than the tax according to the nature of the business in which he is engaged and the temper of the market. The conditions most conducive to the loss of profits equivalent to the entire tax are an extremely elastic demand and a unit production cost increasing sharply as output is reduced." "The amount of the tax that is shifted to the consumer depends on how sharply the demand for the commodity falls off when the price increases and production is reduced, regardless of whether the industry is one of increasing or decreasing costs. In the case of commodities the demand for which is little affected by a rise in price, the price will tend to be increased by the amount of the tax, and in such cases the entire tax will fall on the consumer. To this class belong certain absolute necessities, such as fuel and expensive luxuries bought by the rich, where the price paid has little effect on the amount consumed." - 5 - OPINIONS ON INTER-COMMODITY DISCRIMINATION BY GROSS SALES TAXES a) National Industrial Conference Board, Inc., General Sales or Turnover Taxation, pp. 52-53. "In practice, general sales or turnover taxes do not burden commodities and services exactly proportional to their retail prices, except in the case of retail sales taxes. A multiple-turnover tax - one that is levied on articles more than once in their progress from initial producers to consumers - would, because of its pyramiding, burden some articles heavier than others. Consumers would tend to purchase fewer of the more heavily burdened articles and more of those lightly burdened. Temporarily, the producers and distributors of the first group of articles would find their profits reduced, and producers and distributors of the second group would find their profits increased. After a time the supply of each group of articles would adjust itself to the modified demand. Price changes would follow, according to the circumstances of the production of the affected articles." - 6 - OPINIONS ON PROMOTION OF INDUSTRIAL INTEGRATION BY GROSS SALES TAXES a) Bueler, op. cit., p. 205. "The total amount which a general sales, or turnover, tax adds to retail prices varies directly with the number of taxable transfers of raw materials, semi-processed products,and finished products. Every time a sale occurs the tax must be added, and the large the number of sales between the producer of the raw material and the ultimate consumer of the finished product, the greater is the total tax. Since the value of the product increases as it nears the consumer, a tax at a given percentage of the value adds an ever growing sum at each taxable stage. There is thus a theoretical advantage enjoyed by the large scale producer, who combines various stages of production and distribution under his management, over the competing concerns that perform each stage separately. Since a tax on sales is an added business cost, the products manufactured and marketed by the many small concerns normally must count on larger tax costs than the large integrated concerns product. It is a general rule that the producer selling at the lowest prices obtains the patronage of the market, and the general sales tax operates, in theory, to force the non-integrated concerns to combine or to get out of business by placing a larger tax on the sales of non-integrated establishments." b) Due, op. cit., pp. 195-196. "A general sales tax, by offering possibility of escape from the levy by reducing the number of independent links in the production and marketing process, furthers the tendency to integration, and injures relatively the position of those channels of distribution with numerous separate links. In some cases, this may reduce production costs by forcing a change dictated by economic conditions, but delayed by mere inertia. More likely, however, integration will be forced beyond the limits to which it would be carried on the basis of efficiency of operation. Accordingly, prices to consumers will be raised by an amount more than that of the tax, to compensate for less efficient methods of operation. c) National Industrial Conference Board, General Sales or Turnover Taxes, p. 53. "A multiple-turnover tax would also tend to discriminate among producers and distributors. A multiple-process concern, combining many productive and distributive processes, would be taxed only on its finished output. A series of independent-process concerns in the same business, each concern handling one productive or distributive process, would have to pay the tax on each process. The independent- process concerns would thus bear a special unshiftable tax burden, their profits would be reduced, and a further inducement would be given to business consolidation. Austria eliminates this discrimination against independent-process concerns by consolidating the pyramided tax on each article to a single rate, which is paid alike on the output of multiple-process concerns and of the series of single-process concerns. This system would seem to be inapplicable in the United States because of its administrative complexity." d) Shirras, op. cit., p. 613. "The greatest indictment brought against the sales tax is its encouragement of the integration of industry and its influence on changing methods of business. It is argued that the single-process manufacturer is at a disadvantage with the larger manufacturer of finished goods, who combines with the manufactures of semi-finished goods and the producers of raw materials and thus pays less sales taxation." - 7 - OPINIONS ON THE EFFECTS OF SALES TAXES ON SPENDINGS AND SAVING a) A. H. Hansen, Fiscal Policy and Business Cycles, 1941, pp. 296- 297. "If consumption taxes are employed instead of income taxes, it is likely that the investment will be financed more fully from voluntary savings and less from bank credit expansion. This also would make for a healthier boom. If a sharp step up were made in income tax rates, with no restraint on consumption (via payroll or sales taxes), consumption expenditures would rise rapidly, thereby (via the Acceleration Principle) adding to the investment stimulus (already vigorously fed from the independent factors of economic progress) still more. It thus appears that, under the conditions here assumed, the boom would develop in a more stable manner under a cyclical adjustment of payroll or sales taxes than under a cyclical adjustment of highly progressive corporate and individual income taxes."
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