Scribd Logo
Upload

Welcome to Scribd!

  • 21 views

    Incidence: Tax Incidence Effect of Taxes and Subsidies On Price

    Uploaded by

    Maika J. Pudadera
    The document discusses tax incidence, which is who ultimately pays the tax burden. It states that while taxes may legally be collected from businesses, the marketplace determines who really pays in the form of higher costs that get passed on. For example, a tax on employers will likely impact employees over time in the form of lower wages. The party with the least flexibility, or inelastic demand, tends to bear most of the tax burden. Whether the buyer or seller absorbs more of a tax depends on the elasticities of supply and demand - the more inelastic party absorbs more. For a competitive firm, the tax burden gets distributed among workers, investors, landowners, and customers depending on each group's elasticity.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Incidence: Tax Incidence Effect of Taxes and Subsidies On Price

    Uploaded by

    Maika J. Pudadera
    21 views1 page
    The document discusses tax incidence, which is who ultimately pays the tax burden. It states that while taxes may legally be collected from businesses, the marketplace determines who really pays in the form of higher costs that get passed on. For example, a tax on employers will likely impact employees over time in the form of lower wages. The party with the least flexibility, or inelastic demand, tends to bear most of the tax burden. Whether the buyer or seller absorbs more of a tax depends on the elasticities of supply and demand - the more inelastic party absorbs more. For a competitive firm, the tax burden gets distributed among workers, investors, landowners, and customers depending on each group's elasticity.

    Original Description:

    asdasd

    Original Title

    146

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses tax incidence, which is who ultimately pays the tax burden. It states that while taxes may legally be collected from businesses, the marketplace determines who really pays in the form of higher costs that get passed on. For example, a tax on employers will likely impact employees over time in the form of lower wages. The party with the least flexibility, or inelastic demand, tends to bear most of the tax burden. Whether the buyer or seller absorbs more of a tax depends on the elasticities of supply and demand - the more inelastic party absorbs more. For a competitive firm, the tax burden gets distributed among workers, investors, landowners, and customers depending on each group's elasticity.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    21 views1 page

    Incidence: Tax Incidence Effect of Taxes and Subsidies On Price

    Uploaded by

    Maika J. Pudadera
    The document discusses tax incidence, which is who ultimately pays the tax burden. It states that while taxes may legally be collected from businesses, the marketplace determines who really pays in the form of higher costs that get passed on. For example, a tax on employers will likely impact employees over time in the form of lower wages. The party with the least flexibility, or inelastic demand, tends to bear most of the tax burden. Whether the buyer or seller absorbs more of a tax depends on the elasticities of supply and demand - the more inelastic party absorbs more. For a competitive firm, the tax burden gets distributed among workers, investors, landowners, and customers depending on each group's elasticity.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Incidence[edit]

    Main article: Tax incidence


    See also: Effect of taxes and subsidies on price
    Law establishes from whom a tax is collected. In many countries, taxes are imposed on business
    (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax
    "burden") is determined by the marketplace as taxes become embedded into production costs.
    Economic theory suggests that the economic effect of tax does not necessarily fall at the point where
    it is legally levied. For instance, a tax on employment paid by employers will impact on the
    employee, at least in the long run. The greatest share of the tax burden tends to fall on the most
    inelastic factor involved—the part of the transaction which is affected least by a change in price. So,
    for instance, a tax on wages in a town will (at least in the long run) affect property-owners in that
    area.
    Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and
    demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in
    the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the
    supplier. If the elasticity of demand is low, more will be paid by the customer; and, contrariwise for
    the cases where those elasticities are high. If the seller is a competitive firm, the tax burden is
    distributed over the factors of production depending on the elasticities thereof; this includes workers
    (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in
    the form of lower rents), entrepreneurs (in the form of lower wages of superintendence) and
    customers (in the form of higher prices).
    To show this relationship, suppose that the market price of a product is $1.00, and that a $0.50 tax is
    imposed on the product that, by law, is to be collected from the seller. If the product has an elastic
    demand, a greater portion of the tax will be absorbed by the seller. This is because goods with
    elastic demand cause a large decline in quantity demanded for a small increase in price. Therefore,
    in order to stabilize sales, the seller absorbs more of the additional tax burden. For example, the
    seller might drop the price of the product to $0.70 so that, after adding in the tax, the buyer pays a
    total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this example, the
    buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller has paid the
    remaining $0.30 (in the form of a lower pre-tax price).[49]

    You might also like