A good illustration of tax incidence

Via Marginal Revolution we have seen this post from Steve Landsburg.

So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

Now this is a caricature – like a lot of good economic description – but it does illustrate a point.  If we place tax on one group, be it the rich, or the “bankers”, it isn’t clear who actually faces the burden of this tax until we have a look over all the changes in choices that occur … tax incidence is key.

This is one reason why I remain against a Robin Hood tax.

  • Royal Albert Ross

    But this requires a fixed lump of consumption – if Government consumers more goods, others must consume less – isn’t that just as much of a fallacy as the lump of labour – if old people or immigrants get jobs, that’s less jobs for other people?

  • Gene Callahan

    “But this requires a fixed lump of consumption – if Government consumers more goods, others must consume less…”

    Not at all. Of course there are circumstances in which overall consumption might rise — but what does that have to do with the tax on Kendrick? Nothing.

  • Royal Albert Ross

    @Gene Callahan
    Sorry, don’t understand. It was the whole point of the original article that the case against a Kendrick tax is that if Government consumes more, others must consume less. So if it is actually not true that more consumption by Government must equal less consumption by somebody else, then the article’s case against the Kendrick tax falls.

  • Andrew R

    This is not sound logic unless the $84 million goes to the Government and is then destroyed not respent. So it is really a nonsense argument against a Tobin tax.