Tax Burden
March 17, 2009
Economics define tax incidence as the study and analysis of the outcomes of a specific tax on the sharing of economic interests and welfare. It is believed that tax incidence falls on the category that it will ultimately bear the burden of tax in the long run. This is to mean that the greatest tax burden share will incline on the most inelastic factors entailed.
Theoretically, the economic impact of tax does not mean it will fall at the legally taxed point. For example, at least in the long run, an employment tax paid by employers will be beneficial to the employees. But economists argue that employees end up bearing the tax burden because most employers pass the tax burden in the form of low salaries, thus placing the incidence on employees. On the other hand, a tax on earnings in a town will affect the property owners of the town at least in the long run.
Therefore, it is right to say that the main concept of tax burden or tax incidence depends hugely on the elasticity of the supply price and elasticity of the demand price, and not on the revenue collected. For instance, taxation on banana farmers may actually be paid by the consumers of the bananas or by the agricultural land owners.
Illustration of tax incidence
Take for example a $2 tax on each container of bananas a farmer produces. If the farmer successfully escalates the price by $2, he passes the tax to banana consumers and as a result they bear the entire tax burden, therefore, the tax incidence falls directly on consumers.
However, if the same farmer is unable to raise the prices, the tax incidence falls on him; hence he ends up bearing the tax burden. This means that the tax incidence will ultimately impact on other forms of production, in this case the employee salaries and the farming land. If by any chance the farmer manages to raise the price by half, in this case $1, it will mean that both the farmer and the consumers share the tax burden.
Illustration of Tax burden
Say for example there is a 4% importation tax on all imported goods, and there is a direct reimbursement of each penny of the collected revenue in the form of citizen’s dividend, to all citizens who file Income Tax Returns. This will cumulatively mean that all citizens worldwide will break even. It will also mean that foreign good consumers will bear a heavy tax burden than those who consume locally produced goods, who will not only bear no burden but will get a stimulus check.
The distribution of tax burden on the producer side will vary depending on the production location of the goods. If the goods are locally produced, the producer will enjoy an increased market share and profits compared to producers who offshore their good’s production. Ultimately, employees will hugely benefit from greater employment prospects.
Elucidation
The fall of the tax incidence on the whole depends on the price elasticity of supply and demand whereby the impact is hugely felt on the group that responds least to the price, the group bearing the most inelastic price vs. quantity curve. Be informed also that the taxation burden is not entirely just the quantity of directly or indirectly paid tax, but the significant economic damage, the extent of the lost producer surplus or lost consumer surplus.
This explains why most economists will always use the lost consumer surplus and lost producer surplus as the main determinant factors to examine and analyze the extent of the direction where the tax burden and tax incidence inclines.
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