Papa John and "Passing On"
The response of several businessmen to the upcoming implementation of Obamacare has made quite a splash. Both John Schnatter of Papa John’s Pizza and Denny’s franchisee John Metz announced that the law would impel them to cut employee hours and raise customer prices, which is fair enough.
However, they erred when they both claimed that through such price hikes they would be “passing on” the costs of Obamacare to the consumer. Their error was not only strategic (“Passing on costs to consumers? What heartless, selfish capitalists!”), but conceptual. Rothbard demonstrated in Power and Market that the notion of such “forward tax/cost shifting” is fallacious:
“The idea that the increased cost will be passed on to the consumer by the employer is an illustration of perhaps the single most widespread fallacy on taxation: that businessmen can simply shift their higher costs forward onto the consumers in the form of higher prices. All the economic theory expounded in this book shows the error of this doctrine. For the price of a given product is set by the demand schedules of the consumers. There is nothing in higher costs or higher taxes which, per se, increases these schedules; hence, any change in selling prices, whether higher or lower, will decrease the revenues of the business involved. For each business, on the market, tends to be, at all times, at its “maximum profit point” in relation to the consumers. Prices are already at their point of maximum return for the business; therefore, higher taxes or other costs imposed on the firm will reduce their net incomes rather than be smoothly and easily passed on to consumers. We thus arrive at this significant conclusion: no tax (not just an income tax) can ever be shifted forward.
Suppose that a particularly heavy tax—of whatever type—has been laid on a specific industry: say the liquor industry. What will be the effects? As we have noted, the tax will not simply be “passed on” to the consumers. Instead, the price of liquor will remain the same; the net income of the firms will decline. This will mean that returns will be lower to capital and enterprise in liquor than in other industries of the economy; marginal liquor firms will suffer losses and go out of business; and, in general, productive resources of all types will flow out of liquor and into other industries. The long-run effect, therefore, is to decrease the supply of liquor produced, and therefore, by the law of supply and demand, to raise the price of liquor on the market. However, as we have said above, this process—this diffusion of suffering over the economy—is hardly “shifting.” For the tax is not simply “passed on”; it only permeates to the consumers through hurting the industry taxed. The final result will be a distortion of the factors of production; fewer goods are now being produced than the consumers would prefer in the liquor industry; and too many goods, relatively to liquor, are being produced in the other industry.”