Should We Impose the Tax on the Producer or Consumer? Employer or Employee?

[Economist]

The question of who to "place" a tax on is often brought up in policy debates. For example, people often ask, "Should we impose the tax on the producer or consumer?" or "Should we impose the tax on the employer or employee?"

In reality, this is pretty much a trivial question, because in reality it does not matter who the tax is imposed on, the effects of the tax will be identical. Often times it seems that politicians are able to convince people that the tax won't really effect them, by essentially stating "We'll impose the tax on the other guy." Since most people are employees and most people are consumers more than they are producers, it will usually work out that people will try and place the tax on producers and employers, but in actuality it doesn't even matter.

I think this is incredibly interesting, because in my opinion it's very counterintuitive. I remember how puzzled I was when I first heard this, I thought to myself "It can't be." Anyway, here's some resources to back up my claim.

From Greg Mankiw's blog: http://gregmankiw.blogspot.com/2008/01/taxes-dont-stay-where-you-put-them.html

Taxes don't stay where you put them

What a shock: A tax on producers gets shifted to consumers. The Gazette (via The Misfit) reports

Quebec energy consumers - not just energy producers - are the ones who will end up paying for the province's new green fund. The bills are in the mail.

It wasn't supposed to be this way: When the provincial government imposed the country's first carbon tax last fall, it wanted producers to pay.

But just as oil refiners have already done, Gaz Métro started passing on the cost of the carbon tax this month.

Even the basic lessons of tax incidence, taught in the first few weeks of ec 10, come as a surprise to some people.

From pages 172 - 174 of George Borjas's textbook titled "Labor Economics":

The political debate over payroll taxes often makes it appear that workers are better off when the payroll tax is assessed on the firm, rather than on the worker. In short, there seems to be an implicit assumption that most workers would rather see the payroll tax impsoed on the firms, whereas most firms would rather see the payroll tax imposed on workers. It turns out, however, that this assumption represents a complete misunderstanding of how a competitive labor market works. It does not matter whether the tax is imposed on the worker or firms. The impact of the tax on wages and employment is the same regardless of how the legislation is written. [page 172]

This result illustrates a principle that is worth remembering: The true incidence of the payroll tax (that is, who pays what) has little to do with the way the tax law is written or the way the tax is collected. In the end, the true incidence of the tax is determined by the way the competitive market operates. Even though a payroll tax assessed on the firm shifts down the demand curve, it has the same labor market impact as a revenue-equivalent payroll tax assessed on workers (which shifts up the supply curve). [page 173]

The more inelastic the supply curve, therefore, the greater the fraction of the payroll taxes that workers end up paying. [page 174]

 

[Evo]

I think this is incredibly interesting, because in my opinion it's very counterintuitive. I remember how puzzled I was when I first heard this, I thought to myself "It can't be." Anyway, here's some resources to back up my claim.

From Greg Mankiw's blog: http://gregmankiw.blogspot.com/2008/01/taxes-dont-stay-where-you-put-them.html

Taxes don't stay where you put them

What a shock: A tax on producers gets shifted to consumers. The Gazette (via The Misfit) reports

Quebec energy consumers - not just energy producers - are the ones who will end up paying for the province's new green fund. The bills are in the mail.

It wasn't supposed to be this way: When the provincial government imposed the country's first carbon tax last fall, it wanted producers to pay.

But just as oil refiners have already done, Gaz Métro started passing on the cost of the carbon tax this month.

What is surprising? A good example is your phone bill. The phone companies are required to pay special taxes and fees and they then pass these on to the consumer with charges such as CUSC, USF, Federal Regulatory Recovery, Presubscribed Line Charge, Carrier Property tax. Any time costs increase for a business, it cuts into their profits, so they will usually pass that on to the consumer in some form.

You said that you are taking a class in Economics in school right now. Is this your first exposure to Economics?

 

[Economist]

What is surprising? A good example is your phone bill. The phone companies are required to pay special taxes and fees and they then pass these on to the consumer with charges such as CUSC, USF, Federal Regulatory Recovery, Presubscribed Line Charge, Carrier Property tax. Any time costs increase for a business, it cuts into their profits, so they will usually pass that on to the consumer in some form.

I thought it was somewhat suprising when I learned about it in an economics class I took awhile ago. I didn't think it was the most intuitive thing, but I was fairly ignorant about anything that had to do with economics at that time. I don't think this is intuitive to everyone, I mean if you gave this as a test question and asked a random sample of the population, I think you'd find that the overwhelming majority of people would miss the question.

You're absolutely right, that when you impose a cost on the business it will try to pass these costs along to consumers. However, the companies ability to pass on such costs will mainly depend on the elasticity of demand. I guess if people really wanted the business to bare the brunt of the tax, they could just mainly tax markets where the demand is fairly elastic (although this would possibly create other problems and negative unintended consequences to consumers).

You said that you are taking a class in Economics in school right now. Is this your first exposure to Economics?

Yeah, I am taking a course in economics right now. No, it's not my first exposure to economics, in fact it's advanced microeconomics (interesting class, but highly mathematical (at least for me)). I've probably taken about 10 undergraduate courses in economics, and I generally read a lot of economics related stuff in my spare time. My first economics course was in high school, but that doesn't count because they taught it horribly (I took nothing away from that course). My first quarter of college (a little over 4 years ago) I took introductory microeconomics, and have been hooked ever since.

 

[gravenewworld]

The question of who to "place" a tax on is often brought up in policy debates. For example, people often ask, "Should we impose the tax on the producer or consumer?" or "Should we impose the tax on the employer or employee?"

In reality, this is pretty much a trivial question, because in reality it does not matter who the tax is imposed on, the effects of the tax will be identical. Often times it seems that politicians are able to convince people that the tax won't really effect them, by essentially stating "We'll impose the tax on the other guy." Since most people are employees and most people are consumers more than they are producers, it will usually work out that people will try and place the tax on producers and employers, but in actuality it doesn't even matter.

I think this is incredibly interesting, because in my opinion it's very counterintuitive. I remember how puzzled I was when I first heard this, I thought to myself "It can't be." Anyway, here's some resources to back up my claim.

From Greg Mankiw's blog: http://gregmankiw.blogspot.com/2008/01/taxes-dont-stay-where-you-put-them.html

Yup. Learned this back in Microecon 101. Taxes on the producer always end up being paid by both the producer and consumer.