Midterm assignment 2009-2010
Does it matter for tax incidence if the same amount of tax is imposed on buyers or sellers? If not, then what does matter?
Throughout my essay I intend to discuss how a tax on sellers or buyers affects the proportion of the tax each one will pay, this overall issue known as tax incidence will be discussed. The effects of elasticity (both perfect inelastic and perfect elastic) of demand and supply will be discussed and how they affect the division of tax between the buyer and seller. A conclusion will then be drawn up to evaluate the information discussed and a bibliography page will be drawn up to reveal the sources I have gathered some of my information from. Firstly we need to define exactly what tax incidence is, “The study of tax incidence is broadly defined as the study of the effects of tax policies on the distribution of public welfare and studying of it requires characterizing the effects of alternative tax measures on economic equilibriums” (text reference from Handbook of Public Economics volume II 1987). Effectively then we can say that tax incidence is how a tax imposed on either sellers or on buyers is divided between up them. When the government imposes a tax on an item, its price might rise by the full amount of the tax, here the buyer solely pays the entire burden of tax. If the price rise isn’t as great as the tax amount, the buyer and seller will share the tax. When the price doesn’t rise at all, the seller must bear the full amount of tax alone. We will now look at the separate effects of a tax imposed on buyers as well as tax imposed on sellers. The following is based on a taxation increase on the sales of cigarettes in France in 2003, during which the government increased the tax threefold, we can assume that this tax increase correlates to €1.50 a pack. We must now closely inspect the effects of this tax on demand and supply in the cigarettes...