After reading this article you will learn about the shifting process of various taxes.
1. Taxes on Income:
The individual income tax apples to earnings originating in all sectors of the economy. Taxes on income are of two types. Firstly taxes on the net income of individuals and secondly taxes on net income of business firms. That is taxed on net profits and excess profit.
(a) Taxes on Net Income of Individuals:
A tax imposed upon net income of individuals is generally not shifted. Personal incomes are received in the form of wages, interest and rent. They are imposed on surplus income. Its shifting is difficult, because individuals are the final recipients of income.
Income tax is generally progressive in nature. Its money burden increases with an increase in income and burden of tax falls unequally.
Moreover, income tax can be paid smoothly from surplus income. Hence they are generally not shifted. In certain cases the strongly organized workers may try to get higher wages from their employees by means of collective bargaining in their attempt to shift the burden partly to the employers.
Likewise, a tax on personal income in the form of interest, dividends and rent cannot be generally shifted because it will be normally borne by the taxpayer themselves. It is a fact that, the rate of interest is determined by the money market, rate of dividends by the policy of companies and rent by the contractors.
In such a situation, an individual cannot influence these types of earnings and hence the burden of income tax on such incomes cannot be shifted. It will be upon the taxpayer themselves.
(b) Taxes on Net Income of Business Firms:
Taxes on business income may be of three heads namely taxes on the income of proprietorship and partnerships, corporate income tax and taxes on excess profit.
A tax on the income of proprietorship and partnership refers to the taxes on the normal income of the proprietor and partners. However, taxes on these incomes are generally not shifted like the taxes on personal income.
Corporate income tax is a tax on companies. It is imposed on the net profit of the corporation or joint stock companies. It constitute part of cost and is added to total cost and finally to the prices.
Hence, it is said that such taxes are generally shifted. But the shifting of such taxes depends upon the elasticity of demand and elasticity of supply.
A tax on pure profit (i.e. net profit of the firm after meeting all necessary expenses) falls on surplus income. Such a tax cannot reduce output and discourage investment. Since it falls on surplus income, this tax is uniform in nature also, because it falls equally on all pure profits, irrespective of the source. Besides, it does not touch those business firms which are getting only normal profits.
Hence, the excess profit tax falls upon the residual profit and it will not affect prices, so such taxes are not shifted. But under monopoly, a partial shifting of the tax is possible, because the monopolist control over the supply of the commodity. However, if the monopolist is already maximizing his profit, before the imposition of the tax, the tax incidence will remain upon income.
2. Wealth Tax:
Wealth tax is imposed on value of a persons’ stock of wealth at a point of time, say at the end of financial year. Wealth tax does not discriminate against risky investments. It rather promotes economic development.
Wealth tax helps to reduce economic inequalities by reducing the size of the inherited wealth. The tax is borne by the person on whom it is levied. The wealth tax discourages unproductive investment. Usually, wealth tax cannot be shifted. The person on whom it is imposed bears the entire burden of the tax.
3. Incidence of Property Tax:
Property tax is levied on the gross value of the property irrespective of ownership. Property includes real estate like land and buildings, machinery investments, jeweler, bank balance, bonds etc. In actual practice only the real estates like land and buildings are fixed. In the case of property used for consumption like house and household utensils, the shifting of the tax burden is not possible.
In this case, incidence is on the person on whom the tax is levied. But when the property is used for productive purpose, the producers will try to shift the burden of tax to the consumers. Here also much depends on the elasticity of demand and supply.
4. Incidence of Import Duties:
Import duties are a part of customs duty. It is an indirect tax, intended to be shifted to the consumers.
However, the shifting of these taxes is not a smooth process. The shifting of an import duty depends upon the following conditions:
(1) Whether the foreign producer is in a monopolistic position or to have to face competition either in the country, levying the duty or in other parts of the world. If there is rivalry from other countries competition would compel the foreign producer to pay some of the duty, rather than facing the risk of fall in sales.
Moreover, if the foreign producer is in absolute monopolistic position, he may sometimes choose to bear the burden himself, if he is charging the price which fetch him maximum profit.
Another factor, affecting the chance of shifting an import duty is the relative importance of the country’s market from the point of view of producers if the country imposing the tax is the only country which import the commodity, the tax has to be borne mainly by the producer.
However, if markets are available in other countries, the foreign producer will turn towards, that country if the consumers in the country where import duty is imposed, refuse to pay the tax.
The third condition is the elasticity of demand for the foreigner’s product. If the demand is inelastic tax will be added on to the price and consumer will bear the burden in the form of increased price.
The size of the market for the imported commodity in the importing country is also important. Suppose a considerable part of the exports of A’ is absorbed in ‘B’s market, the producer then may be compelled to bear a part of the tax himself rather than facing the risk of losing the market.
5. Shifting of Export Duties:
A export duty is levied by the government either to get a large revenue or to prevent exports. For example, the government may apply export duty on the exportation of exhaustible natural resources such as iron-ore or other mineral wealth, which can be used for the development of industries at home.
Export duties are generally unpopular because they are the opposite of export bounty. In this sense composition of an export duty places the exporter at a disadvantage. It is possible for the exporter to add the tax to the price of the commodity and shift the burden to the foreign consumer. But its success will depend on the demand condition of his product in the foreign market.
If the foreigner is able to get the commodity from some other countries, he will not bear the tax and then the exporter cannot shift the burden to the foreign importer. But if the demand is inelastic, the foreigner will be compelled to pay the whole tax or part of it. This depends on the rate of export duty also.
Moreover, the conditions under which the commodity is produced at home affect the chance of shifting. If the producing country is in a monopolistic position, the tax can be shifted to the foreign importer. Hence it can be stated that in the case of export and import duty, the degree of shifting depends primarily on demand and supply conditions. That is elasticity of demand and supply.
6. Shifting of the Sales Tax:
Generally sales tax is shifted by the producer or the trader to the final consumer. Sales tax belongs to the family of indirect taxes. All indirect taxes are generally forward shifted.
According to Bastable, no burden of the sales tax remains on the producers who pay the tax immediately and the consumers who bear it ultimately cannot shift it on to the shoulders of others. Here also shifting primarily depends on elasticity of demand and supply of the taxed commodity.
If the demand for the commodity is inelastic, the entire burden of the sales tax will be borne by the consumers and if the demand is elastic, the incidence will be borne by the seller.
Sales taxes are always shifted through price rise in a forward position. Moreover, certain forces of economic friction effect the shifting of sales tax. Rigidity in the supply condition, availability of substitutes, business conditions etc. determine the degree and extent of forward shifting of sales tax.
7. Incidence of Death Duties:
There is difference of opinion regarding the incidence of death duties. One vies is that incidence of death duties is on the testator. It is argued that death duties are looked upon as a kind of deferred income tax.
Hence, the incidence also falls on the testator. Another view is that the incidence is on the successor. It is the successor who actually pays the tax. The amount of the duty is fixed with reference to the actual share going to each successor. Hence, the incidence is on the successor.
The third view is that the incidence is neither on the testator, not on the successor but on the estate itself. The rate of tax does not depend always on the size of the estate alone. Hence, the problem of incidence of death duty depends largely or what the testator would or would not do. Hence, no correct generation can be drawn in the case of death duties.