Incidence of Tax in the Real Life (With Diagram)

After reading this article you will learn about the incidence of tax in the real life.

The main principles of the theory of incidence are condensed by Dalton to form a general preposition of the theory of incidence of taxation. In the real market situations, most commodities have de­mand and supply curves which are less than perfectly elastic. The usual shape of demand curve is downward slopping and supply curve upward rising.

Hence in most cases, the demand and supply curves are partly elastic and partly inelastic. Dalton states the general preposition in the form of two laws. Firstly other things being equal, the more elastic the demand for the object to be taxed, more will be the incidence of the tax upon the seller, secondly, other things being equal, the more elastic the sup­ply of the object taxed, more will be the incidence upon the buyer.

In order to find out the incidence of tax, we will have to see the exchange relation that follows after the imposition of the tax. This can be expressed in a diagrammatic form, to demonstrate that inci­dence of a tax, ultimately depends on the elasticity of demand and supply (Figure No. 4.4).

Quantity Demanded and Supplied

In figure No. 4.4, DD is the demand curve and SS is the supply curve for a particular commodity. At this position PM is the price per unit and PN quantity sold per unit of time. Now suppose that a tax is imposed on the commodity and collected from the sellers.

Let S1S1 be the post taxed supply curve and P1M1 the post taxed price. P1N1 is the new quantity sold and P1D, the tax per unit.

Now due to the imposition of the tax price rise by P1C and the sales fall by Pc. The incidence of the tax P1D is divided between buyers and sellers. The buyer bears P1C and the seller bears CD.

The preposition can be expressed in the following form:

Therefore, the incidence is divided between buyers and sellers in the ratio of the elasticities of supply to the elasticities of demand. Therefore P1c/CD = es/ed. This gives a better method of finding out the incidence of a tax and its measurement. The basic postulate is that tax burden will be distributed between the buyer and seller depending upon the degree of elasticity of demand and supply of fixed commodity.

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