Of course, the tariff is a special case within the enormous structure of grants, both implicit and explicit, involved in the system of taxes and subsidies. The problem of the ultimate incidence of taxation — that is, what the final effect of a particular tax is on the distribution of economic welfare — is one of the most difficult and complex problems in all of economics, and it is closely related to the entire structure of explicit and implicit grants.
Neoclassical economics made some important contributions to this subject, especially with regard to the most immediate and short-term impacts. For example, the proposition that all taxes tend to fall on economic rent and to be shifted away from those sectors of the economy that produce commodities with elastic demand and supply certainly corresponds to something in the real world.
A large part of incidence theory of this kind can again be summarized in the proposition that what adjusts is what is adjustable, and that what is not adjustable must bear the burdens of adjustment.
Any change in the tax system will therefore tend to redistribute economic welfare in ways that affect, for better or worse, those who cannot adjust more than those who can. Thus, some will bear the burdens and the recipients of economic rents will receive the benefits, simply because economic rent arises from inelastic supplies, and these in turn arise from lack of adaptability: that is, from the inability to transfer resources without incurring costs.
The classic case of Ricardian rent is that in which the commodity, land, has a perfectly inelastic supply; that is, it will be supplied regardless of the price or the exchange ratio of its supplier. In this case, any change in net demand will fall on the supplier, whether it results from taxation or from other causes.
In this way, subsidies to agriculture tend ultimately to go to landowners, especially those who owned land at the time the subsidy was provided, since the subsidy will tend to be capitalized into the value of the land. The supply of land is inelastic and non-adjustable, while the supply of farmers and laborers is much more elastic.
Consequently, a subsidy to any sector will tend to attract capital and labor until returns are once again normal, including the subsidy, and all the benefits of that subsidy will tend to fall into the hands of landowners. There may be important exceptions to this depressing conclusion, but there are enough examples of it to show that it cannot be dismissed.
It is perhaps less widely recognized in traditional economics that spontaneous changes in consumer demand — or, more likely, changes in demand from the public sector — also create a problem of incidence; that is, they create a pattern of implicit grants.
A shift in demand away from tea and toward coffee will create short-term implicit grants from tea producers, whose incomes are reduced, to coffee producers, whose incomes are increased. In the long run, of course, tea producers may begin producing coffee, or something else. But in the short run, which may last quite some time, a real structure of implicit grants exists.
The principles of incidence theory are also applicable to this case: the costs will be borne and the benefits received by the recipients of economic rent.
The structure of implicit grants involved in the advertising sector and in the entire sales sector of the economy is of great interest and has been very little studied. Advertising is a one-way transfer of information, part of which is designed to be persuasive; that is, to change the structure of society’s demand, both among individuals and in the public sector.
It may therefore create a system of implicit grants, resulting in transfers toward those sectors of the economy that succeed in increasing demand for their product by this method, and away from those sectors that fail to do so. I have seen very little analysis of this problem in conventional economic theory.
Political persuasion may be equally important. Party propaganda and pressure from interest groups constantly operate to change the structure of political power and public spending, and much of this will have a redistributive effect.
A field that is perhaps less familiar to traditional economic theory, but that nevertheless falls within its normal limits, is the distributive effect of quantitative restrictions, whether imposed by government or by private organizations.
Such restrictions, including quotas, licenses, prohibitions, rationing and direct allocations, have become increasingly important instruments of both public and private policy in this century. The resulting implicit grants, or redistributive effects, are enormous and are often neither recognized nor well understood.
Any type of quantitative restriction implies a license granted to certain people to carry out a certain activity and, consequently, a prohibition against carrying it out, with appropriate sanctions, for those who do not receive the license.
The administration of all quantitative restrictions tends to take this form, and the effects are often very different from what the original decision-makers intended — simply one part of the plan. The system of implicit grants involved in these economies is extremely interesting and very little studied, but it is too complex a problem to be dealt with in this book.
