Impact Incidence and Shifting of Taxation BAIIIVSemEconomics Prepared
Impact, Incidence and Shifting of Taxation BAII(IV-Sem)Economics Prepared By-Dr. Suneyna Department of Economics
Impact of taxation The term impact is used to express the immediate result of or original imposition of the tax. The impact of a tax is on the person on whom it is imposed first. Thus, the person who is paying the tax to the government bears its impact.
Incidence of tax When a tax is imposed on some person, it is quite possible that it may be transferred by him to a second person, and this tax may be ultimately borne by this second person or transferred to others by whom it is finally borne. Thus, the person who originally pays the tax may not be actually bearing its money burden as such. This problem is, therefore, to determine who bears the tax, ultimately. This is known as incidence of taxation.
For example, when a sales tax is imposed on Bata shoes, but the company’s shop recovers it from the buyers, so the incidence of this tax lies on the buyers since they ultimately bear its money burden. Thus the incidence of a tax refers to the extent to which an individual or organisation suffers from the imposition of a tax – it may fall on the consumer, the producer, or both. The incidence is also called the ‘burden’ of taxation.
Mrs. Ursla Hicks concept of Incidence • Formal Incidence- The direct money burden of a tax, called formal incidence. • Effective Incidence is considered to be the economic effects of the tax in a broader sense. Musgrave concept of Incidence • Specific tax incidence is one when the pattern of distribution changes due to the imposition of a new tax or by changing the rates of existing taxation, keeping public expenditure and other budgetary phenomena unchanged. • Differential tax incidence refers to change in the distribution pattern in the economy caused by substituting one tax for another, total tax revenue being unchanged.
Shifting of Taxation Tax shift is a kind of economic phenomenon in which the taxpayer transfers the tax burden to the purchaser or supplier by increasing the sales price or depressing the purchase price during the process of commodity exchange. Tax shift is the redistribution of tax burden. It is fundamental that the real burden of taxation does not necessarily rest upon the person who is legally responsible for payment of the tax. Forexample-General sales taxes are paid by business firms, but most of the cost of the tax is actually passed on to those who buy the goods that are being taxed. In other words, the tax is shifted from the business to the consumer.
Taxes may be shifted in several directions. Forward shifting takes place if the burden falls entirely on the user, rather than the supplier, of the commodity or service in question—e. g. , an excise tax on luxuries that increases their price to the purchaser. Backward shifting occurs when the price of the article taxed remains the same but the cost of the tax is borne by those engaged in producing it—e. g. , through lower wages and salaries, lower prices for raw materials, or a lower return on borrowed capital.
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