Rolph on the Aggregate Effects of a General Excise Tax

In a stimulating and provocative analysis of the fiscal aspects of taxation, Rolph has stressed the deflationary property of a general and uniform excise tax.1 In sum, he argues that under competitive pricing conditions, sellers cannot arbitrarily raise prices when an excise tax is levied. Instead, each firm has an incentive to reduce output as the tax lowers the ‘net’ prices of products. Thus there is a corresponding reduction in the demand for hired resources. Given government expenditures, the distribution of income and assets, and assuming full employment of a given quantity of resources, Rolph concludes that factor owners are forced to take a lower price for their services ‘and hence the money income of owners are proportionately reduced’.2 Thus, according to Rolph, a system of general and uniform excise taxes in an economy with flexible factor prices, (1) leaves the level and composition of output unchanged, (2) does not raise product prices, but (3) does proportionately reduce the money income of all resource owners.