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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
As you can read from the image, corporate tax seems to be bad for car companies but because owners invest in other industries it is relatively good for other industries. Doesn't that cancel out the bad effect corporate tax may have on the car industry?
Transcribed Image Text: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.
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