Journal Article Corporate Taxation and Dividend Behaviour: a Reply and Extension Get access Martin S. Feldstein Martin S. Feldstein Harvard University Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 39, Issue 2, April 1972, Pages 235–240, https://doi.org/10.2307/2296876 Published: 01 April 1972

A full assessment of the long-run incidence of the social security tax requires answers to four questions. 1) How much does the tax alter the quantities of and capital supplied? 2) How do changes in factor supplies affect the marginal products of and capital? 3) How is the wage rate and the return on capital related to these mlarginal products? 4) How does the tax affect the relative prices of the goods consumed disproportionately by and by the owners of capital? Brittain's theoretical discussion deals with the supply of labor. His emprical analysis is concerned onlx with questions 2) and 3) and provides no information about the effect of the tax on factor supplies. Most analyses of the incidence of the payroll tax concentrate on the tax's effect on the supply of labor. A more elastic aggregate supply generally implies that, ceteris paribus, a smaller fraction of the burden falls on labor. Brittain concludes from his theoretical discussion that the tax does not change the quantity of supplied, and that the burden of the tax therefore falls on labor. Because of the tax's affects on the capital stock and on relative prices, the second does not follow even the first is true. However, I will concentrate on examining the basis of Brittain's conclusion that the quantity of is unaffected by the tax. If the aggregate supply were completely inelastic with respect to the wage rate, it is obvious that it would also be unaffected by the tax. The important question is the effect of the tax the supply is elastic. Brittain concludes that in this case the tax will not change the quantity of supplied labor bargains in terms of total (p. 114). The assumption that bargains in terms of total compensation implies that the quantity of supplied at each gross wage is unaffected by what fraction of the gross wage is paid in taxes, and that any tax change is therefore ignored by both employer and employee. Brittain accepts this extremely implausible assumption as the basis for his strong conclusion because of a more general error in his analysis. Although the question at issue should be the incidence of the entire payroll tax, Brittain concentrates his attention on the share paid by the employer. Moreover, he implicitly assumes that the employees' share of the tax is viewed by them as equivalent to income and therefore entirely borne by labor! He then concludes that, since it would be irrational to treat the two parts of the tax differently, the employers' share must also be borne by labor. More specifically, Brittain states that the employers' share of the tax would not be fullborne by only if the supply curve of were not perfectly inelastic and the supply price excluded the employer's tax (p. 115). He then rejects the latter condition in favor of the view that is indifferent between a higher net wage and a higher employer tax contribution. He argues that to believe otherwise depends on viewing one withheld tax as part of its income but not the other. This behavior (is) difficult to rationalize . . (p. 115). That is, since income taxes and the employees' portion of the payroll tax are, by implicit assumption, treated as net income and therefore borne by * Professor of economics, Harvard University.

I. Introduction, 175. — II. The optimal price, 176. — III. The welfare loss due to incorrect pricing, 182. — IV. An example, 183. — V. Concluding remarks, 187.

The three primary conclusions of my previous study can be summarized briefly. First, there appears to be a permanent excess demand for physicians' services. The observed prices and quantities are not points on the demand function and the market does not follow a Marshallian or Walrasian process of adjustment to remove the excess demand. Second, physicians' fees rise when patients' ability to pay improves through higher income or more complete insurance coverage. More than a third of the potential gain from improved insurance coverage has been dissipated by induced price increases. Third, the supply equation indicates that physicians reduce the quantity of services provided when fees rise. This in turn implies that government action to control physicians' fees may increase the quantity of services provided. Professors Brown and Lapan raise some questions about the research and about the first and third of these conclusions. However, a careful analysis of their note shows that the original conclusions can remain unchanged. Their own discussion, on the other hand, contains a number of serious errors.