Shifting and incidence of taxes

1. Presented by: Neeraj kumar A presentation on Shifting and Incidence of Taxes

2. Traditional concept In the process of taxing, Seligman distinguishes three concepts: A tax may be impose on some person. It may be transferred by him to a second person. It may be ultimately borne by this second person or transferred to others by whom it is finally assumed .

3. Definitions Shifting : The process of transfer of a tax, while its impact lies on the person who pays it at first instance. Or Shifting is the process through which a taxpayer escapes the burden of a tax. Forward shifting: Tax burden from the producer to the consumers in the form of higher price of the commodity. Price serves as the vehicle through which a tax is shifted. Backward shifting: When the imposition of a tax caused a reduction in the prices paid to the factor-owner.

4. Definitions Incidence of tax: is the settlement of the tax burden on the ultimate taxpayer. It is thus the ultimate resting of a tax upon individuals or class who cannot shift it further. Musgrave’s concept of Incidence: A change in the budget policy produces three effects, namely- Resource transfer effect , Distributional effect and Output effect . Distributional effect: The resulting change in the distribution of income available for private use is referred to as incidence.

5. Definitions Incidence is thus applied distribution theory where the focus is on how various tax systems affect returns and commodity prices. A budget has two sides- the tax side and the expenditure side . But concern with incidence has traditionally focused on the tax side of the picture only.

6. Incidence of taxes: Individual Case Incidence of commodity Taxes: Traditional view: The tax constitutes an addition to the costs and prices must increase to cover the rise in costs. Whether the price will increase to enable the firm to shift the tax depends on – The nature of the tax, The economic environment under which the tax is levied, and Taxpayers practice in taking advantage of any possibility of shifting.

7. A tax cannot be shifted: ( i ) when it is purely personal and (ii) when it is levied upon “economic surplus”. A commodity tax is levied on the product of a firm. The tax leads to the price and cost adjustments and the burden of the tax may be borne by the enterprise that pays the tax at the first instance or it may be shifted forward to the consumers of the product.

8. It is proposed to be examined under demand elasticity how the price rise compares with the size of the tax rise. P Q S R T T S Price Quantity D Highly elastic Demand SS- Supply curve before any tax levied TT- The imposition of tax shifts supply curve R- commodity purchase P- Commodity purchase at higher price

9. R’ T’ S’ T’ S’ Q’ P’ D’ (B)Moderately elastic demand R’’ T’’ S’’ T’’ S’’ Q’’ P’’ D ’’ Demand Elasticity (C) Absolutely Inelastic demand Price Price Quantity Quantity When commodity is produced at constant cost, the relative elasticity of demand exclusively determines the long -term reaction of price and output to the imposition of the tax.

10. Summery The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.

11. THANK YOU!