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. Escape from
tax
Revenue to No Revenue to
government government
Through Through
process of process of Legitimate Illegitimate
exchange production
Smuggling or
Shifting Capitalization Transformation Intentional
tax dodging
Forward Unintentional Deterioration
Backward
4. 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.
5. 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.
6. 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.
7. 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.
8. • 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.
9. It is proposed to be examined under demand elasticity how
the 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
10. Demand Elasticity
T’ P’ T’ T’’ P’’ T’’
Price
Price
S’ R’ S’ S’’ Q’’ S’’
Q’ R’
’
D’
D’’
Quantity Quantity
(B)Moderately elastic demand (C) Absolutely Inelastic demand
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.
11. 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.
