Highlight the factors that affect effective incidence of tax

1) Types of tax. Type of tax e.g. in the case of a sales tax, the sellers quite often adopt the practice of quoting the sale price as seen and once the bargain has been settled, add the sales tax in the bill. Such a practice tends to break the resistance of the buyers and it becomes easier to shift the incidence of the tax on to them.
2) The price of good. It sometime happens that with a large usage or advertising and publicity, some prices comes to be fixed and acceptable as normal, tax or no tax. It is not easy to shift the tax here by means of a price vice. However a possibility may exist to shift the tax by deteriorating the quality or reducing the size of the taxed object. Restaurant quite often adopt the policy of reducing the sizes of various eatables as a substitute for raising prices. Sometimes, the market may be controlled by a small group of sellers and by a convention. it may be difficult to change the price unless everyone does so. e.g. newspapers having the same price in a city. In this case, it will be easier for all of them to raise the price and if any one of them wants to do so, it would be better to reduce the number of pages or reduce the quantity.
3) The tax rate. The shifting of tax depends to a great extent upon the tax rate. If the tax is
quite small and the market is competitive, the sellers may choose to absorb the tax in order to maintain the good will of the buyers.
4) Availability of substitute. It will be more difficult to shift the tax to the buyer in the case of a commodity tax which has close and effective substitute. The consumers will then have an easy mean of shifting their demand if the price of their taxed goods is raised. It means that the elasticity of demand for these goods will be high and so the tax will have to be borne by the sellers. However, if the substitutes are also taxed, then the shifting of the tax incidence will depend upon the general pattern of the demand elasticity for this group of commodities as a whole vis-à-vis the pattern of their supply elasticity.
5) Tax area. In the case of goods taxation the geographical coverage of a tax has a great influence in determining the incidence of the tax in the taxed area. Since the untaxed goods will be available in the neighboring area, there will be great resistance of the buyers to bear the tax incidence. The price of the good will therefore rise to an extent much smaller than would be the case if geographical area of the coverage was complete. In order to discourage buying of the taxed commodity in the neighboring untaxed areas and bringing them in, the authorities often impose a use tax on the taxed goods if it is
brought in from the untaxed area.
6) Time period. Time factor influence the shiftability of a tax. In the short period supply is inelastic. Hence, during this period greater part of tax burden will be borne by the seller. In the long-run, supply is more elastic. Hence, there is a better scope for shifting tax burden upon the buyer. Therefore in short period, shifting of a tax is difficult, whereas in the long-run it is easy to do.
7) Nature of demand for commodities. By this we mean whether the taxed commodity is falling under the category of necessity, comfort or luxury. In the case of necessary goods, demand is inelastic. Hence the burden of tax is higher upon the buyer, than on seller. In the case of comfort, demand is more elastic, hence burden of tax will be divided between buyer and seller. In the case of luxury demand is elastic, hence the burden of tax is more on the seller. It cannot be easily shifted to the consumers.
8) Business conditions. During periods of rising prices and economic prosperity, taxes can be shifted more easily. However, during periods of depression, forward shifting of tax liability is very difficult.
9) The policy of the government. Tax laws clearly indicate the price to be charged and to be printed on the product cover. Likewise the government fixes maximum retail price. Those who charge higher prices are legally punished. On the other hand, if prices are increased due to the attempt to shift some taxes to be paid by the seller, awareness of tax laws helps the consumer to resist it.

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NatalieR answered the question on June 22, 2022 at 09:55