Incidence of the Corporation Tax in U.S. Manufacturing: Reply.

In their original study "The Shifting of the Corporate Income Tax," by M. Krzyzaniak and R.A. Musgrave (K-M) claimed that indeed manufacturing corporations have succeeded in doing so, while in his paper the author of this article found no evidence that the burden of the corporation income tax has been shifted. He suggested that K-M had been led astray by ignoring a fundamental economic phenomenon, that the productivity of corporate assets in manufacturing increased by more than 60 per cent between the late 1920's and the 1950's and, by almost any theory of pricing, this would have allowed a substantial increase in the rate of return on assets even if the corporate tax had never been introduced. In the author's regressions the productivity of capital entered as an independent variable explaining the rate of return and reduced the co-efficient on the tax variable nearly to zero. In K-M's regressions, on the other hand, nothing like the productivity of capital appeared, and hence the only variable with a positive secular trend, the tax rate, was called upon to provide the entire explanation of high postwar profits and therefore appeared with a coefficient significantly greater than one.