The principle of shifting and incidence has no more important application to any part of a revenue system than to customs duties. To the uninformed it has appeared that the importer has simply added the amount of the duty to the former price, and that the consumer consequently has borne the burden. The problem of shifting, however, does not permit of such a simple solution. The underlying principles of shifting and incidence, discussed in the preceding chapter, apply as much to customs duties as to any other form of revenue.

Elasticity of Demand and Supply. - The two controlling factors in the shifting of a customs duty, then, are the elasticity of demand, and the elasticity of supply. If the demand were absolutely inelastic, then the importer could continue to import as many goods as before, and sell them at a price, increased by the amount of the duty. Such a situation, however, would rarely exist, and the direction which the shifting will take will depend upon the relative elasticity of demand and supply. More frequently than has been supposed, a part of the burden at least will rest upon the importer. This happens when the price is either not raised at all or raised by an amount equal to only a part of the tax. Consideration will be given to the possibility of shifting import duties in only a few assumed cases.

Influence of Extended Market. - It is seldom true that any one country is the sole market for an imported good. The laws of trade will have so worked themselves out, under existing conditions, that the seller will be receiving approximately the same net return from the sales in the various countries. If, now, one of these countries levies an additional tax, it will be more profitable to send some of the goods to other countries until the diminished supply would so raise the price as to bring about again an equilibrium of profits. This would come about before the price had raised by quite the amount of the tax, because the increased supply to the other countries would lower the price there. In this case the larger part of the tax is shifted to the consumer, while only a minor part is felt by the producer.

Importer Bears Burden of Duty. - In some cases, though rarely, a large share of the tax burden may rest upon the producer or importer. In case the demand could be easily supplied by home producers at a slightly higher price, while this market is necessary for the disposition of the foreign product, the foreigner may bear the whole burden of the tax rather than allow the potential home producer to occupy the field. The situation would be temporary if he expected to dispose of only an existing stock of goods which would otherwise be lost, but which could not continue to be produced with the added expense of the tax. If, however, the former margin between cost and selling price had been sufficient to allow the payment of the tax and still continue to produce, the situation would be permanent.

It may be possible, moreover, that a particular country constitutes practically the entire market for products. If the demand for these be strongly elastic, the producer will bear the tax until he can change the nature of his production. He may lose by bearing the burden, but he would lose more by the immediate curtailment in demand through an increased price. If the commodity of importation is one which is largely used as a substitute for another, which can be obtained at small increase in price, or if it be one for which a satisfactory substitute can be obtained at a small additional cost, it will be impossible to increase the price perceptibly to offset duties, for by so doing the market would be destroyed. The shifting could be accomplished only if the price of the other product should advance sufficiently.

Other hypothetical cases might be given to show the varying phases of the incidence of customs duties. Enough have been given, however, to show that the laws of price are the determinants. In general, when the demand is inelastic and the supply elastic, the conditions are favorable for the shifting of the tax, while the opposite conditions make it unfavorable. The possible effect of an attempted shifting upon the home production of goods is always a modifying factor. It should not be forgotten, moreover, that even when the price can be raised by the full amount of the tax, some burden is felt by the producer because of the decrease in the demand for his goods.