Important conditions which influence and modify the principles of tax shifting which have just been considered, are the elasticity of supply and demand. A supply may be said to be elastic when a small change in price would cause a perceptible change in the amount of goods produced. If a large part of a supply of goods were produced at practically a uniform cost, and this were near the selling price, it would be impossible for producers to bear an appreciable tax burden without greatly curtailing the amount of goods produced. If the tax could not be successfully shifted under such conditions, the amount of goods produced would be materially lessened. If there were a substantial margin between cost and selling price, however, the tax might be borne by the producer, for this would create a condition of inelastic supply.

Elasticity of Demand. - Of no less importance is the elasticity of demand. The condition of elastic demand • exists when a small change in price will cause a perceptible change in demand. The greater the degree of elasticity the more difficult it is to shift a tax. The addition of even a small tax to the current price, when the demand is very elastic, will cause a perceptible falling off in the demand for the product. Some consumers may find substitutes, while others may forgo the use of the particular utility. The less the degree of elasticity in demand, however, the easier a tax may be shifted to the consumer. If the product be a necessity for which there is no substitute, then a tax, to almost any extent, might be added to the price, and the consumer would bear it.

The effect of such shifting, however, may not stop here. The consumer, because of the high prices which he must now pay for these necessities, may materially lessen his consumption of other goods. This decreased demand will cause a lowering in their price. The burden of such a tax then is noticed in other lines of production, for these producers must either curtail production or accept a lower price for their product.

Direction of Shifting. - The relative elasticity of supply and demand has an important influence in determining 12 the direction which the shifting of a tax may take. So far the suggestion has been that taxes are shifted only toward the consumer. This is necessarily true only when the tax is levied upon the first stage of a productive process, and not when it is levied on any of the intermediate stages.

Suppose the processes in production are manufacturer, wholesaler, jobber, and retailer, and that a tax is placed upon the wholesaler. He wishes to shift this, and may do it by raising his price to the jobber, who will recoup himself by exacting more from the retailer, who in turn will increase the price to the consumer. He may shift the tax, on the other hand, back to the manufacturer, in refusing to pay as high a price as previously for the product. He would pursue the first course if the manufacturer were already selling at near the cost of production while the demand for the product was comparatively inelastic. If there were a wide margin between the manufacturer's cost and his selling price, while the demand were elastic, he would pursue the second course. When a tax is levied on some intermediate stage of production, then, its shifting will likely take the direction of greatest inelasticity.

It is entirely too much to expect that fiscal authorities should give the principles which determine the shifting and incidence of taxes primary consideration in the levy of every tax. It would be well, however, for them to have a thorough knowledge of these principles, while more frequent attempts at their application might help to equalize tax burdens.

Additional Reading

Carver, Essays in Social Justice, chap. xvii. Seligman, The Shifting and Incidence of Taxes.