SuurCe: New rork limes U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways-for example, by buying larger houses or by building fac- tories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall. The corporate income tax shows how dangerous the flypaper theory of tax in cidence can be. The corporate income tax is popular in part because it appea to be paid by rich corporations. Yet those who bear the ultimate burden of the tax-the customers and workers of corporations-are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters.

SuurCe: New rork limes U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways-for example, by buying larger houses or by building fac- tories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall. The corporate income tax shows how dangerous the flypaper theory of tax in cidence can be. The corporate income tax is popular in part because it appea to be paid by rich corporations. Yet those who bear the ultimate burden of the tax-the customers and workers of corporations-are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.10P

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