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fall in part on the producers where the latter are in a position to hold prices at a scarcity point, we cannot assure ourselves what proportion of the whole tax will lie upon him.
$4. It is important to approach the question of the incidence of import duties with a clear apprehension of the effects of taxes on "monopolised " or
scarcity” goods, because many economists, who support the policy of free imports, have assumed too absolutely the liability of the producers of these classes of imports to bear the entire tax. Though it is possible, in theory, at least, for a state to devise taxes on domestic monopolies or scarcity products which shall divert to the treasury the whole of the scarcity value, it is not even in theory possible to do this by such methods of taxation as are open to a foreign government which cannot deal directly with incomes, but only with produce entering a country.
In dealing with import duties on articles produced under conditions of monopoly or scarcity, we have seen that the possibility of making the producers bear the tax seemed to depend upon the fact that the price of the goods imported was not a competitive price, but one containing a surplus over and above the necessary expenses of production. If it is difficult, or impossible, under such circumstances to devise import duties which are certain to fall entirely on the producer, it is not to be expected
that this can be done in the case of goods produced under ordinary competitive conditions.
Where agricultural or manufactured goods are produced by farmers or manufacturers whose competition keeps profits down towards a minimum, it would seem that no fund existed upon which an import duty could lie, and that any attempt to tax such imported articles must obviously defeat its end by checking production and raising prices.
S 5. Now, while this rough analysis will be found to be substantially correct, we are not entitled to jump to the conclusion that “the consumers must pay all the tax."
Though there are here no scarcity rents at the margin upon which a duty may lie, there may be certain differential rents which can in part be made to bear a duty on imports.
Let us first take the case of agricultural produce entering a foreign market, not in competition with the home produce, but as the sole supply of some sort of food or raw material. Suppose that Great Britain could grow no wheat, but drew her entire supply from foreign lands. What would be the effect of placing a duty on this class of imports? It is clear that the duty could not be shifted by the importer who first paid it entirely on to the producer, because the farmers who grew wheat under conditions which made it only just worth while growing it would stop growing wheat, and the
shortage of supply thus caused would raise the price; neither could it be shifted entirely on to the consumer in enhanced price, because the whole of the wheat supply could not be regarded as so absolutely “necessary" for consumption that raised prices would have no influence in reducing demand ; and any reduction in demand would prevent the price rising to the full extent of the duty.
It is quite evident that some reduction in the supply of wheat will take place (the margin of cultivation rising) in consequence of the net price paid to the producers being lower than before, and that some reduction in the demand for wheat will take place in consequence of the net price charged to customers being higher. In other words, the duty will be divided in its incidence between producer and consumer.
In the case of an article of such prime importance in the standard of consumption as wheat, the elasticity of demand will be slight, or, in other words, a rise in the price to the consumer will have a comparatively slight effect upon demand. If, on the other hand, a considerable portion of the supply is produced under conditions of minimum profit to capital and labour, i.e. on land near the “ margin,” we have a combination of conditions which will force the consumer to pay most of the duty. If, at the same time that a duty is put on wheat, duties are also put on alternative goods, the elasticity of demand
for wheat will be kept at its lowest, and the proportion of the tax which the consumer would bear will be at its largest. Of course, if alternative grains and other foods which were in some degree substitutes for wheat were left untaxed, the attempt of wheat growers to recoup themselves for the payment of the duty by raising prices might be largely defeated by the rapid shrinkage of demand. So, again, if very little wheat was grown near the margin of profit -most of it earning a high differential rent-a fall of net price might not drive out of cultivation a large quantity of wheat land. In either of these cases the producer might bear a considerable part of the duty.
Alternative uses of wheat land for other markets or for other agricultural uses, alternative foods on the part of the consumers, will play a large part in determining the incidence of the duty.
Since every fall of price must have some effect in checking supply, and every rise of price in checking demand, it is not possible that the entire burden of the tax should fall either on producer or consumer; it must be shared.
What applies to agricultural produce will likewise apply to mining produce. An import duty will be divided in its incidence according to the restrictive elasticity of the supply and the demand, taking into consideration in each case the law of substitution. In as far as the duty falling on the mineowner
renders it no longer profitable to work the poorer seams, it restricts the supply of ores; this restriction of supply raises the price of ore, until this rise of price, checking demand, brings about a equilibrium of supply and demand at a price higher than the old price, but not higher by the full extent of the tax. Thus the duty here, too, is divided between producer and consumer.
$6. The case of an import duty on manufactured goods (not competing with home products) is different. The normal condition of the import trade is one of keen competition between manufacturers in the same or in different nations—a competition which tends to keep down profits to a common low level. Under these circumstances the producers cannot bear any considerable tax, and any duty which is paid by them must lead to a corresponding rise of price which shifts the burden on to the consumer. Nor does the rise of price necessarily stop there. For the first rise of price, as it checks demand for the manufactured imports, will tend to throw the manufacturers upon a restricted output, which is less economical than the larger output they formerly enjoyed; expenses of production per unit of the manufactured product will rise, and this rise will force a further rise of price.
This must, I think, be regarded as the normal result of a duty upon manufactured imports under ordinary conditions of well-established competition. Of course,