Short-Run Corporate Tax Shifting by Profit-Maximizing Oligopolists

Abstract

The assumption of firm-level profit maximization is frequently used to show that firms cannot shift a tax on economic profits in the short run. It is the purpose of this paper to show that the traditional assumption of firm-level profit maximization does not preclude short-run shifting of a profits tax by firms in a multifirm industry even if the firms normally behave in a noncollusive manner. It is shown that noncolluding firms who independently maximize profits subject to a general reaction function can shift the tax provided that they believe that their competitors will try to do so, and that there exists in the pretax situation sufficient unrealized industry profit to enable them to do so. In essence, the argument is that the imposition of the profits tax may cause firms who believe that they can shift the tax to consumers to raise their prices and reduce their output simultaneously so as to move the industry as a whole closer to the profit-maximizing level of output.