The Incidence of the Corporation Income Tax in U.S. Manufacturing, 1925-62.

The best-known empirical study of the shifting of the corporation income tax is that of economists, M. Krzyzaniak and R.A. Musgrave (K-M), who conclude that in the short run in the U.S. manufacturing more than 100 per cent of the burden of the corporation income tax is shifted forward to consumers. In the K-M study the coefficient on the tax variable is positive and significantly greater than 100 per cent, implying that corporations respond to an increase in tax liabilities by raising pit-tax profits by more than the tax liability. This article presents a result opposite to that of K-M and finds that on the average the corporation income tax is not shifted in the short run in the U.S. manufacturing. The tool of analysis, as in the K-M study, is a set of time-series regression equations in which the corporation profit rate is the dependent variable. A firm maximizing profits as in traditional theory would not react to the imposition of a corporation income tax by raising prices, because its price is set by equating marginal revenue and marginal cost, and the tax affects neither marginal revenue nor marginal cost. Instead of maximizing profits most of the businessmen attempts to maintain some target ratio of profits to sales.