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Tax Incidence is the effect of a particular tax on the distribution of economic welfare. Tax Incidence can also be related to the price elasticity of supply and demand. This wall will include some videos, websites, and images related to Tax Incidence.

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This video talks about different types of taxes and what the government does to make money from taxes. It uses tax on milk as a example on how tax effects the sales of milk.

I chose this video because it talks about different types of taxes and what they effect and it also uses an example with a very common bought item and how it effects sales. One piece of information I found useful in the video is how the guy talks about different types of taxes and not just the one tax that's put on everything.

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This website tells a lot about tax incidence and what it is. It says what tax incidence is to how it works in different ways and in different examples.

I chose this website because I think it includes a lot of helpful and important information about the topic and it explains well what tax incidence is. One piece of information that I found useful that I didn't find on other websites is there is a section that talks about the relation between price elasticity and tax incidence.

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What Is a Tax Incidence?

Tax incidence (or incidence of tax) is an economic term for understanding the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers. Tax incidence can also be related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.

How Tax Incidence Works

The tax incidence depicts the distribution of the tax obligations, which must be covered by the buyer and seller. The level at which each party participates in covering the obligation shifts based on the associated price elasticity of the product or service in question as well as how the product or service is currently affected by the principles of supply and demand.

Tax incidence reveals which group-consumers or producers-will pay the price of a new tax. For example, the demand for prescription drugs is relatively inelastic. Despite changes in cost, its market will remain relatively constant.

Levying New Taxes on Inelastic and Elastic Goods

Another example is that the demand for cigarettes is mostly inelastic. When governments impose a cigarette tax, producers increase the sale price by the full amount of the tax, transferring the tax burden to consumers. Through analysis, it is found the demand for cigarettes is unaffected by price. Of course, there are limits to this theory. If a pack of cigarettes suddenly increased from $5 to $1,000, consumer demand would fall.

If the levying of new taxes on an elastic good, such as fine jewelry, occurs, most of the burden would likely shift to the producer as an increase in price may have a significant impact on the demand for the associated goods. Elastic goods are goods with close substitutes or that are nonessential.

Price Elasticity and Tax Incidence

Price elasticity is a representation of how buyer activity changes in response to movements in the price of a good or service. In situations where the buyer is likely to continue purchasing a good or service regardless of a price change, the demand is said to be inelastic. When the price of the good or service profoundly impacts the level of demand, the demand is considered highly elastic.

Examples of inelastic goods or services can include gasoline and prescription medicines. The level of consumption across the economy remains steady with price changes. Elastic products are those whose demand is significantly affected by price. This group of products includes luxury goods, houses, and clothing.

The formula for determining the consumer's tax burden with "E" representing elasticity is as follows:

E (supply) / (E (demand)) + E (supply)

The formula for determining the producer or supplier's tax burden with "E" representing elasticity is as follows:

E (demand) / (E (demand) + E (supply))

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Tax incidence (or incidence of tax) is an economic term for understanding the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers. Tax incidence can also be related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers.

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This image shows what Tax incidence is and what it represents.

I chose this image because it gives a good idea of what happens in tax incidence and the changes of the supply curve.

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Taxes impact both the consumer (demand) and producer (supply).

Consumer and producer surplus are maximized when there is no taxation.

When a per unit tax is imposed on the producer, the supply curve decreases (shifts to the left).

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Tax Incidence and Deadweight Loss - Duffka School of Economics

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Taxes impact both the consumer (demand) and producer (supply). Consumer and producer surplus are maximized when there is no taxation. When a per unit tax is imposed on the producer, the supply curve decreases (shifts to the left).

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This image shows a good example of the incidence of gas taxes and what happens.

I chose this image because I think its important to include a image of a tax incidence that happened.

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Published on

Incidence of the Gasoline Tax
 In the new equilibrium, total tax
revenue will be $8 million per day,
equal to the area of the entire
shaded rectangle ABFE
 Consumers will bear 80% of the
burden ($6.4 million), equal to the
blue shaded area ABDC, because
the price they pay including tax
has gone up by 80 cents
 Sellers will bear 20% of the burden
($1.6 million), equal to the tan area
CDFE, because the price they
receive after the tax is paid goes
down by 20 cents
June 21, 2014 Ed Dolan's Econ Blog

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Who Really Pays Taxes? The Question of Tax Incidence

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This website talks about tax incidence and microeconomics and the relation between them. It gives a lot of examples of each.

I chose this website because I like how it talks about microeconomics on the website also and how microeconomics is related to tax incidence. One piece of information I found on this website that I didn't find on other ones is that it talks about tax incidence but then it gives a quiz at the end of the information to quiz you on what you learned from the website which some people might find very useful.

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Learning Objectives

Explain how the price elasticities of demand and supply determine the incidence of a tax on buyers and sellers

Elasticity and Tax Incidence

People often assume that when government imposes a tax on purchases of some product, producers simply raise the price of the product so that consumers end up paying the tax. Makes sense, right? Except like many economic myths, it's not true. The analysis, or manner, of how a tax burden is divided between consumers and producers is called tax incidence. Tax incidence depends on the price elasticities of supply and demand.

The example of cigarette taxes introduced previously demonstrated that because demand is inelastic, taxes are not effective at reducing the equilibrium quantity of smoking, and they mainly pass along to consumers in the form of higher prices. With other products, however, the burden of the tax can be very different. Let's drill down into these ideas.

Watch It

This video introduces the idea of the tax burden and demonstrates how taxes impact both consumers and producers. Look closely at the graphs towards the end of the video to graphically see how different elasticities cause the tax incidence to shift. When the demand is inelastic, consumers pay more of the tax, but when demand is elastic, the burden falls on the producers.

Typically, the tax incidence, or burden, falls both on the consumers and producers of the taxed good. However, if one wants to predict which group will bear most of the burden, all one needs to do is examine the elasticity of demand and supply. In the tobacco example, the tax burden falls on the most inelastic side of the market.

Note also, that when taxes on sales affect the equilibrium quantity, there are effects on economic welfare. You can see that as reductions in consumer surplus, reductions in producer surplus and deadweight loss. The size of these changes depends on the price elasticities of demand and supply.

Let's consider another example. Imagine a $1 tax on every barrel of apples that an apple farmer produces. If the product (apples) is price inelastic to the consumer then the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1. In this situation, consumers bear the entire burden of the tax, or the tax incidence falls on consumers. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic, the farmer has to bear the burden of the tax through decreased revenues, therefore the tax incidence falls on the farmer. If the apple farmer can raise prices by an amount less than $1, then consumers and the farmer are sharing the tax burden. If demand is more inelastic than supply, consumers bear most of the tax burden, and if supply is more inelastic than demand, sellers bear most of the tax burden.

The intuition for this is simple. When the demand is inelastic, consumers are not very responsive to price changes, and the quantity demanded reduces only modestly when the tax is introduced. In the case of smoking, the demand is inelastic because consumers are addicted to the product. The government can then pass the tax burden along to consumers in the form of higher prices, without much of a decline in the equilibrium quantity.

Similarly, when a government introduces a tax in a market with an inelastic supply, such as, for example, beachfront hotels, and sellers have no alternative than to accept lower prices for their business, taxes do not greatly affect the equilibrium quantity. The tax burden now passes on to the sellers. If the supply was elastic and sellers had the possibility of reorganizing their businesses to avoid supplying the taxed good, the tax burden on the sellers would be much smaller. The tax would result in a much lower quantity sold instead of lower prices received. Figure 1 illustrates this relationship between the tax incidence and elasticity of demand and supply.

Glossary

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Explain how the price elasticities of demand and supply determine the incidence of a tax on buyers and sellers People often assume that when government imposes a tax on purchases of some product, producers simply raise the price of the product so that consumers end up paying the tax.

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This website tells about some of the history behind tax incidence and how tax started and the first people who kind of discussed what taxes are and how they should work.

I chose this website because I think that it is important for people to know how tax incidence started and who created it. The history behind it is interesting. One piece of information that I found on this website and not others is it talks about the first people to discuss tax incidence and price elasticity. The first people to talk about tax analysis were French economists who were called the physiocrats.

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Tax incidence, the distribution of a particular tax's economic burden among the affected parties. It measures the true cost of a tax levied by the government in terms of lost utility or welfare. The initial incidence (also called statutory incidence) of a tax is the initial distribution among

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This website talks about the impact and incidence of taxes and how taxes effect the world and what they do for the world.

I chose this website because the impact of taxation is big and is important to talk about because it makes a big impact in economics. One piece of information I found useful on this website that I couldn't find on other ones is it talks about the difference between impact and incidence. I find that useful because not a lot of people know the difference between the two so its important to talk about.

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Distinguish Between Impact and Incidence of Taxation!

The term impact is used to express the immediate result of or original imposition of the tax. The impact of a tax is on the person on whom it is imposed first. Thus, the person who is Habile to pay the tax to the government bears its impact. The impact of a tax, as such, denotes the act of impinging.

The term incidence refers to the location of the ultimate or the direct money burden of the tax as such. It signifies the settlement of the tax burden on the ultimate tax payer.

Incidence emerges when the tax finally settles or comes to rest on the person who bears it. It, in fact, is the ultimate result of shifting. Hence, the incidence of a tax is upon that person who cannot shift the burden any further, so he has to himself bear the direct money burden of the tax.

It is, thus, easy to distinguish between the impact and incidence of taxation:

1. Impact refers to the initial burden of the tax, while incidence refers to the ultimate burden of the tax.

2. Impact is at the point of imposition, incidence occurs at the point of settlement.

3. The impact of a tax falls upon the person fr6m whom the tax is collected and the incidence rests on the person who pays it eventually. For example, suppose a tax - excise duty - is imposed on soap.

Its impact is on the producers, in the first instance, as they are liable to pay it to the government. But, the producers may succeed in collecting it from the consumers by raising the price of soap by the amount of tax. In that case, consumers eventually pay the tax and so the incidence falls upon them.

4. Impact may be shifted but incidence cannot. For, incidence is the end of the shifting process. Sometimes, however, when no shifting is possible, as in the case of income tax or such other direct taxes, the impact coincides with incidence on the same person.

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Distinguish Between Impact and Incidence of Taxation

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ADVERTISEMENTS: Distinguish Between Impact and Incidence of Taxation! The term impact is used to express the immediate result of or original imposition of the tax. The impact of a tax is on the person on whom it is imposed first. Thus, the person who is Habile to pay the tax to the government bears its [...]

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1. Something I learned about tax incidence that surprised me the most is how much it impacts economics and how it is essentially tax burden.

2. A real-life example of tax incidence being relevant is how when the government increases or decreases tax on items it can drastically effect the supply and demand of items.

3. I think the most important piece of information to pass onto someone is how its important to not invest in things with high tax due to the possibility of changes.

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This video talks about the areas of consumer surplus, producer surplus, tax revenue, and dead weight loss. It goes over all of those areas after each market was taxed.

I chose this video because I think its important to talk about all areas of economics that get effected by taxes and what taxes do to there buyers and sellers. One piece of information I found useful is how it talks about the effect on each area after each was taxed the same amount.

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Identifying tax incidence in a graph  | APⓇ Microeconomics | Khan Academy

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This video talks about the impact of taxes using the supply and demand model. It goes over a lot of examples of different types of taxes and the fraction paid by the buyers of the product.

I chose this video because it goes over a lot of examples of different types of taxes effecting buyers different ways and it shows the fraction of tax paid by the buyers in each example. One piece of information I found useful that isn't in other videos is how it goes to the fraction of tax paid by the buyers and how much more they pay with tax.

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Tax Incidence Using Price Elasticities of Demand and Supply

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This video talks about how a sales tax would effect producers and consumers in an example. The video shows how to measure each effect by showing the equation to use.

I chose this video because it shows how to find the effect of sales tax by showing the equation and how to solve the equation which helps the viewers understand tax incidence better and what exactly tax incidence is. One piece of information I found in the video that isn't in other videos is the step by step walkthrough of how to do the equation of the effect of taxes.