Incidence of taxation and features

Incidence of taxation , What is tax incidence? Incidence of taxation refers to the point at which the tax burden finally rests. The burden here refers to the amount paid as tax. The incidence or burden of taxation therefore lies on the person who finally pays the tax.

Types of incidence of taxation

Formal incidence: This refers to the initial effects of tax on the tax object i.e. the tax payer. It shows where the initial burden of taxation lies. For direct tax the initial burden of tax is borne on the payer. The producers or manufacturers bear the initial burden of tax in case of indirect taxes

Effective incidence: The effective incidence of tax makes references to that bears the final burden of taxation. With reference to direct taxes, the payer bears the full (initial and final) burden of taxation. problems associated with tax collection

 For instance, a person who pays income tax bears the full burden of tax and the cannot shift it to another person. In the case of indirect taxes, the burden of taxation may be borne by the producer (seller) or the consumer or shared between them.

 The extent to which either or both of them bear the burden of taxation will depend on the elasticity of demand for the commodity which is taxed. Incidence of taxation

features of incidence of tax

Incidence of indirect tax when demand is perfectly inelastic: The burden of an indirect tax on a commodity whose demand is perfectly inelastic is borne by the consumer. In this case, the whole tax burden can easily be shifted to the consumer by the producer (or seller) in the form of higher prices because increase in price does not bring about any change in quantity demand. Incidence of taxation Incidence of taxation

 tax is represented by AB. This tax increases the manufacturer’s cost of production. Since the same quantity is purchased irrespective of the price, the manufacturer increases the price of the product from PI to P2. The consumer bears the full burden represented by rectangle Incidence of taxation

Incidence of indirect tax when demand is perfectly elastic: If demand  for a commodity is perfectly elastic, the producer or seller will bear the whole burden of taxation.

This is so because any attempt to increase price will make the demand for the product fall to zero. The tax burden under this situation cannot be passed to the consumer.

 tax is represented by EF. Since the tax increases the manufacturer’s (seller) cost of production, the quantity supplied decreased from Q1 to Q2.

 However, the price remains at P since any attempt to increase price will make demand to drop to zero. The manufacturer or seller retail trader-– therefore bears the whole tax burden represented by rectangle PEFG.

 Incidence of indirect tax when demand is moderately elastic or moderately inelastic: If the demand is moderately elastic or moderately inelastic, the burden of taxation will be shared between the producer (or the seller) and the consumer. The more inelastic the demand for the commodity, the more burden of tax is shifted to the consumer. On the other hand, the more elastic the demand for the commodity, the greater the burden of taxation the producer (or seller) bears.

the producer or seller bears the tax burden represented by P1HIJ while the buyer bears P2GHP1. The producer therefore bears the greater burden. But in 32.4, the area which represents the burden borne by the consumers is larger than that of the producer or seller.

Incidence of tax when demand is unitary: If demand is unitary, the tax burden is shared equally between the producer (or seller) and the consumer.

           the producer passed half of the tax burden to the consumer in the form of higher prices.

The tax represented by RT, and the price increases from P1 to P2. The tax burden borne by the consumer is represented by P1SRP2 while the tax burden borne by the seller or producer is represented by VTSP1. The two rectangles are equal because both the consumer and the producer bear incidence of taxation equally.

  1. economic tools for nation building
  2. budgeting
  3. factors affecting the expansion of industries
  4. mineral resources and the mining industries
  5. demand and supply
  6. types of demand curve and used
  7. advertising industry
  8. factors of production
  9. entrepreneur
  10. joint stock company
  11. public enterprises
  12. private enterprises
  13. limited liability companies
  14. migration
  15. population
  16. market concept
  17. money market
  18. shares
  19. how companies raises funds for expansion
  20.  
  1. BALANCED DIETS
    141. LACTATION DIETS
    142. MALNUTRITION
  2. RINDER PESTS
    148. NEWCASTLE DISEASE
    149. BACTERIA DISEASES
    150. ANTHRAX
    151. BRUCELLOSIS
    152. TUBERCULOSIS
    153. FUNGAL DISEASES
  3. PROTOZOAN DISEASES
    155. TRYPONOSOMIASIS

    159. TAPE WORM
    160. ROUND WORM OF PIGS
    161. LIVER FLUKE
    162. ECTO PARASITES
    163. TICK

let us know what you think

This site uses Akismet to reduce spam. Learn how your comment data is processed.