Note 8: A tax upon shoes, paid in the first
instance by shoe manufacturers, enters into
manufacturers' prices, and, together with the usual rate
of profit upon that amount of investment, is recovered
from wholesalers. The tax and the manufacturers' profit
upon it then constitute part of the wholesale price and
are collected from retailers. The retailers in turn
collect the tax with all intermediate profits upon it,
together with their usual rate of profit upon the whole,
from final purchasers — the consumers of shoes.
Thus what appears on the surface to be a tax upon shoe
manufacturers proves upon examination to be an indirect
tax upon shoe consumers, who pay in an accumulation of
profits upon the tax considerably more than the
government receives.
The effect would be the same if a tax upon
their leather output were imposed upon tanners. Tanners
would add to the price of leather the amount of the tax,
plus their usual rate of profit upon a like investment,
and collect the whole, together with the cost of hides,
of transportation, of tanning and of selling, from shoe
manufacturers, who would collect with their profit from
retailers, who would collect with their profit from shoe
consumers. The principle applies also when taxes are
levied upon the stock or the sales of merchants, or the
money or credits of bankers; merchants add the tax with
the usual profit to the prices of their goods, and
bankers add it to their interest and discounts.
For example; a tax of $100,000 upon the
output of manufacturers or importers would, at 10 per
cent as the manufacturing profit, cost wholesalers
$110,000; at a profit of 10 per cent to wholesalers it
would cost retailers $121,000, and at 20 percent profit
to retailers it would finally impose a tax burden of
$145,200 — being 45 per cent more than the
government would get. Upon most commodities the number of
profits exceeds three, so that indirect taxes may
frequently cost as much as 100 per cent, even when
imposed only upon what are commercially known as finished
goods; when imposed upon materials also, the cost of
collection might well run far above 200 percent in
addition to the first cost of maintaining the machinery
of taxation.
It must not be supposed, however, that the
recovery of indirect taxes from the ultimate consumers of
taxed goods is arbitrary. When shoe manufacturers, or
tanners, or merchants add taxes to prices, or bankers add
them to interest, it is not because they might do
otherwise but choose to do this; it is because the
exigencies of trade compel them. Manufacturers,
merchants, and other tradesmen who carry on competitive
businesses must on the average sell their goods at cost
plus the ordinary rate of profit, or go out of business.
It follows that any increase in cost of production tends
to increase the price of products. Now, a tax upon the
output of business men, which they must pay as a
condition of doing their business, is as truly part of
the cost of their output as is the price of the materials
they buy or the wages of the men they hire. Therefore,
such a tax upon business men tends to increase the price
of their products. And this tendency is more or less
marked as the tax is more or less great and competition
more or less keen.
It is true that a moderate tax upon
monopolized products, such as trade-mark goods,
proprietary medicines, patented articles and copyright
publications is not necessarily shifted to consumers. The
monopoly manufacturer whose prices are not checked by
cost of production, and are therefore as a rule higher
than competitive prices would be, may find it more
profitable to bear the burden of a tax that leaves him
some profit, by preserving his entire custom, than to
drive off part of his custom by adding the tax to his
usual prices. This is true also of a moderate import tax
to the extent it falls upon goods that are more cheaply
transported from the place of production to a foreign
market where the import tax is imposed than to a home
market where the goods would be free of such a tax
— products, for instance, of a farm in Canada near
to a New York town, but far away from any Canadian town.
If the tax be less than the difference in the cost of
transportation the producer will bear the burden of it;
otherwise he will not. The ultimate effect would be a
reduction in the value of the Canadian land. Examples
which may be cited in opposition to the principle that
import taxes are indirect, will upon examination prove to
be of the character here described. Business cannot be
carried on at a loss — not for long.
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