A presentation onShifting and Incidence of Taxes PRESENTED BY: NEERAJ KUMAR
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.
Escape from tax Revenue to No Revenue to government government Through Through process of process of Legitimate Illegitimate exchange production Smuggling orShifting Capitalization Transformation Intentional tax dodging Forward Unintentional Deterioration Backward
DefinitionsShifting: The process of transfer of a tax, while its impact lies on theperson who pays it at first instance. Or Shifting is the process throughwhich a taxpayer escapes the burden of a tax.Forward shifting: Tax burden from the producer to the consumers inthe form of higher price of the commodity. Price serves as the vehiclethrough which a tax is shifted.Backward shifting: When the imposition of a tax caused a reduction inthe prices paid to the factor-owner.
DefinitionsIncidence of tax: is the settlement of the tax burden on theultimate taxpayer. It is thus the ultimate resting of a tax uponindividuals or class who cannot shift it further.Musgrave’s concept of Incidence: A change in the budget policy produces threeeffects, namely- Resource transfer effect, Distributional effect andOutput effect.Distributional effect: The resulting change in the distribution ofincome available for private use is referred to as incidence.
Definitions•Incidence is thus applied distribution theory where the focus is onhow 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 ofthe picture only.
Incidence of taxes: Individual Case•Incidence of commodity Taxes: Traditional view: The tax constitutes an addition to the costsand prices must increase to cover the rise in costs.Whether the price will increase to enable the firm to shift the taxdepends 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.
• 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 thetax may be borne by the enterprise that pays the tax at the firstinstance or it may be shifted forward to the consumers of the product.
It is proposed to be examined under demand elasticity howthe price rise compares with the size of the tax rise.Price T P T R SS- Supply curve before any tax levied S S TT- The imposition of tax shifts supply Q curve D R- commodity purchase P- Commodity purchase at higher price Quantity (A) Highly elastic Demand
Demand Elasticity T’ P’ T’ T’’ P’’ T’’ PricePrice S’ R’ S’ S’’ Q’’ S’’ Q’ R’ ’ D’ D’’ Quantity Quantity (B)Moderately elastic demand (C) Absolutely Inelastic demandWhen commodity is produced at constant cost, the relative elasticity of demandexclusively determines the long -term reaction of price and output to theimposition of the tax.
SummeryThe key concept is that the tax incidence or tax burden does notdepend on where the revenue is collected, but on the priceelasticity of demand and price elasticity of supply.