The Short-Run Economic Effects of Corporate Taxation
of corporate tax rate increases on the price level of corporate goods and services. Subsidiary effects on the non-corporate sector and the general price level which may occur in the long run are, therefore, ignored. For a long time many economists accepted the hypothesis that the corporation income tax cannot be shifted in the short run. This conclusion is based on the analysis of the tax shifting process within the framework of the neoclassical theory of the firm. With the help of this theory it is possible to demonstrate that if a firm is maximizing its before-tax profits, the imposition of or a change in the statutory rates of a corporation income tax gives the firm no reason to change its product price. Neither marginal cost nor marginal revenue is affected by the tax, hence price and output adjustments are not advantageous. The argument holds irrespective of the form of competition in the product market so long as the point of profit maximization occurs at the equality of marginal cost and marginal