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THE POTENTIAL FOR SHORT-RUN SHIFTING OF A CORPORATE PROFITS TAX

Authors

  • J. Richard Aronson,

    1. Department of Economics, Lehigh University, Bethlehem, Pennsylvania, USA
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  • Peter J. Lambert,

    1. Department of Economics, University of Oregon, Eugene, Oregon, USA
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  • Victor J. Tremblay

    Corresponding author
    1. Department of Economics, Oregon State University, Corvallis, Oregon, USA
    • Correspondence: Victor J. Tremblay, Department of Economics, Oregon State University, Corvallis, Oregon 97331-3612, USA; Tel: 541-737-1471; Fax: 541-737-5917; Email: v.tremblay@oregonstate.edu. The authors wish to thank Jayendra Gokhale, David Gowland, Stephen Trotter, Anca Cristea, Thomas Groll, and especially Mary Deily for their help in the construction of this paper, and a referee of this journal for insightful comments.

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ABSTRACT

Can the owners of a firm shift a corporate profits tax to consumers? Not in the short run if the tax is stated as a proportion of profits and the firm is a profit maximizer. But what if the firm wishes to pursue a strategy other than profit maximization, say revenue maximization subject to a profit constraint? Under such a condition the firm's reaction to a tax or tax increase might be a price rise that captures part of the foregone profits. We show that firms which operate at a point on their demand curve that differs from profit maximization have an incentive to raise price in response to the tax – and that high cost firms have a greater incentive to raise price than do low cost firms. Our empirical analysis of the US beer industry confirms this finding, and sheds light on the Krzyzaniak–Musgrave analysis of the 1960s which suggested that the corporation income tax produced significant short-run shifting.

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