will pay $450 000 in corporate taxes. CHI’s after-tax accounting
profits will now be $1.05 million. But the presence of the
corporate tax does not change the opportunity cost of the
owner’s capital and time; when including these costs ($1.1
million), CHI’s economic profits are –$50 000. Negative
economic profits indicate that the owner’s capital is now
earning less than what is available in the (equally risky) next-
best alternative investment. In this situation, CHI may soon
leave this industry.
Negative economic profits and the exit from the industry will
obviously have implications for its output and employment
decisions. In particular, as CHI scales down its operations, its
workers will be laid off or have their wages reduced. And as
supply in this industry falls, product prices will rise until the
remaining firms earn enough profits to keep them in the
industry.
The bottom line is that if the corporate income tax applies to
accounting profits (and results in negative economic profits),
some of the burden of the tax falls on consumers and workers.
Only part of the burden of the tax falls on firms and their
owners. Because the tax leads to changes in the allocation of
resources, it also generates some inefficiency. We will see this
idea in more detail later in this chapter when we discuss what
economists call the “excess burden” of taxation.