SHORT-RUN CORPORATE TAX SHIFTING BY PROFIT-MAXIMIZING OLiGOPOLISTS

8 The assumption of firm-level profit maximization is frequently used toAbstract show that firms cannot shift a tax on economic profits in the short run. Itis the purpose of this paper to show that the traditional assumption ofrum-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 noncolludingrums who independently maximize profits subject to a generalreaction 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 causefirms who believe that they can shift the tax to consumers to raise their prices and reduce their output simultaneously so as to mo,ve the'industry as a whole closer to the profit-maximizing level ofoutput