Taxes Reduce Income

Let me tell you how it will be
There's one for you, nineteen for me
--The Beatles

This essay by Rothbard is well timed as Republican candidates salvo back and forth about what is the proper type of tax--i.e., income versus consumption, et al.

Rothbard argues that type of tax is largely moot, as all taxes ultimately come out of the hides of individual incomes. Take for instance a general sales tax. It is often claimed that producers shift the costs of sales taxes forward to the consumer. But Rothbard observes that producers set prices at all times to maximize net revenue. A producer cannot simply pass along a 10% increase in cost from a sales tax along to the consumer as prices are already set at highest net income levels for the firm.

In the near term the stock (supply) of goods has already been produced and won't change. Consumer demand has not changed either and has no reason to. As such, supply and demand do not change, and neither will price.

In the longer run (which won't be long), retail firms will not be able to absorb the cost of the tax. As firms on the downstream end of the supply chain pay sales taxes and lose income, their demand curves for intermediate goods and all factors of production, including labor, will shift downward. Wage rates and employment will decline.

Instead of shifting costs of a sales tax forward, the costs will be shifted backward, painfully, on incomes. Thus, the alleged tax on consumption is transfered by market processes to a tax on income.