Taxation, as we have seen, takes from producers and gives to others. Any increase in taxation swells the resources, the incomes, and usually the numbers of those living off the producers, while diminishing the production base from which these others are drawing their sustenance. Clearly, this is eventually a self-defeating process: there is a limit beyond which the top-heavy burden can no longer be carried by the diminishing stock of producers. Narrower limits are also imposed by the disincentive effects of taxation.

So far, we have discussed the impact of a tax on an individual considered by himself. Equally important is the distortion of the market’s pattern of factor prices and incomes, created by the way taxes bear down upon different people. The free market determines an intricate, almost infinite array and structure of prices, rates, and incomes. The imposition of different taxes disrupts these patterns and cripples the market’s work of allocating resources and output.

No discussion of taxation, however brief, can overlook the famous problem of “the shifting and incidence” of taxation. In brief, who pays a tax? The person on whom it is levied, or someone else to whom the former is able to “shift” the tax?

The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply “pass on” the 20-percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms.

Wherever taxes fall, they blight, hamper, and distort the productive activity of the market. Clearly, a tax on wages will distort the allocation of labor effort, a tax on profits will cripple the profit-and-loss motor of the economy, a tax on interest will tend to consume capital, etc. One commonly conceded exception to this rule is the doctrine of Henry George that ground-landowners perform no productive function and that therefore the government may safely tax site value without reducing the supply of productive services on the market.

In this necessarily hasty overview of the high spots of taxation theory, we have space for only one more comment: a criticism of the very common view that, in a business boom, the government should increase taxation “in order to sop up excess purchasing power,” and thereby halt the inflation and stabilize the economy. We shall discuss the problems of inflation, stabilization, and the business cycle below; here, let us note the oddity of assuming that a tax is somehow less of a social cost, less of a burden, than a price. Thus, suppose, in a boom, that Messrs.

Taxation, as we have seen, takes from producers and gives to others. Any increase in taxation swells the resources, the incomes, and usually the numbers of those living off the producers, while diminishing the production base from which these others are drawing their sustenance. Clearly, this is eventually a self-defeating process: there is a limit beyond which the top-heavy burden can no longer be carried by the diminishing stock of producers. Narrower limits are also imposed by the disincentive effects of taxation.

So far, we have discussed the impact of a tax on an individual considered by himself. Equally important is the distortion of the market’s pattern of factor prices and incomes, created by the way taxes bear down upon different people. The free market determines an intricate, almost infinite array and structure of prices, rates, and incomes. The imposition of different taxes disrupts these patterns and cripples the market’s work of allocating resources and output.

No discussion of taxation, however brief, can overlook the famous problem of “the shifting and incidence” of taxation. In brief, who pays a tax? The person on whom it is levied, or someone else to whom the former is able to “shift” the tax?

The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply “pass on” the 20-percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms.