Public Finance: Impact, shifting and Incidence of Taxation
Tax incidence | Impact of Tax, Shifting of Tax | Ultimate Burden | Immediate burden of tax
The
burden of this tax does not always lie on the person who is imposed the tax in
first instance, it may also burden to other person. So the person who initially
pays the tax may not bear this burden, he can shift it to other person. Hence,
we need to know who bears the immediate burden of tax and who
bears the ultimate burden of a tax, as the result we have
to make clear the concept of impact of a tax and incidence of a tax.
Tax
Impact or Impact of Taxation
Impact
of taxation refers to the immediate burden of the tax. The impact of a
tax is the immediate result of the imposition of a tax on the person who pays
it in the first instance.
The
impact of tax refers how introduction of taxation or the raising of tax levels,
on a particular product or service, affects usages of product or service. The
introduction or increase of tax, for example, usually results in the product or
service being purchased less often. As a result, the impact of tax, or tax
impact, is usually negative for the development of an economy, as it hinders
and reduces spending, which is necessary for the growth of an economy.
Tax Incidence
Tax
incidence is the degree to which a given tax is paid or borne by a particular
economic unit such as consumers, producers, employers, employees etc. When we
say that the tax incidence of a given tax falls on Mr. Z, it means Mr. Z ultimately pays or bears the burden of tax in greater proportion.
The incidence of a tax rests on the person (s) whose real net income is reduced by the tax. 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. 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. Finally, a tax may not be shifted at all—e.g., a tax on business profits may reduce the net income of the business owner.
Keywords: Tax incidence, Impact of Tax, Shifting of Tax, Ultimate Burden, Immediate burden of tax
