Shine Inc. manufactures laundry detergent and other cleaning products. This year, the government increased the corporate tax rate by 2 percent. The marketing department determined that Shine could not raise its prices and retain its market share. The production department concluded that manufacturing costs cannot be reduced by another penny. Consequently, Shine's before-tax profits remain constant, while after-tax profits decline by the full tax increase. The stock market reaction to the decline in earnings is a fall in Shine's stock price.
a. Who bears the incidence of the increase in Shine's corporate tax?
b. How would your answer change if Shine held its after-tax profit constant by shutting down the on-site day care center for its employees' preschool children and eliminating this operating cost from its budget?