Incidence, Impact and Shifting of Tax

Incidence of tax refers to the final resting place of tax payment. It is concerned with the analysis to determine on whom the money burden falls or rests. The person who directly pays the tax to the government, feels the impact of tax.  Hence, impact of tax is concerned with the immediate effect of imposition of tax while incidence of tax is concerned with the final resting place of tax. 

Difference between Incidence and Impact of Tax

The impact of tax lies directly on the person who pays the tax but it is not necessary that he will also bear the money burden of tax (incidence of tax).  The money burden of tax (incidence of tax) may be shifted by him on another person who will partially or wholly bear the money burden.

For example – When government charges taxes in form of custom or excise duty from traders and producers of a commodity, they pay the tax directly to the government at the first instance, but may shift the burden of tax on consumers by charging higher prices.

Here the impact and incidence of tax lies on different people i.e. the impact lies on the producer but incidence lies on the consumer.

Elements of Incidence of Tax  

  • It refers to the ultimate impact of tax
  • It is the money burden of a tax
  • The money burden of tax is direct

Shifting of Tax

When the burden of tax is passed on by the tax payer on another person it is known as shifting of tax.

Every person tries to shift the burden of tax to another person, shifting of tax may done in the following two ways –

  • Single point shifting – When a producer shifts the burden of tax on his product to the consumer.
  • Multi-point shifting – When the burden of tax is shifted at several points like from producer to wholesaler to retailer and then to consumer.

On the basis of tax shifting it may be forward or backward.

For Example – When a producer shifts his tax burden on consumer it is forward shifting.  But, if the retailer pressurizes the producer to cut down prices rather than charging higher prices from consumers (to avoid financial losses due to elastic demand of a product) it is called backward shifting of tax.  Therefore, shifting of tax depends upon the nature of commodity.

  • If a commodity has an elastic demand the tax burden will be shifted backwards.
  • If a commodity has an inelastic demand the tax burden is shifted forward.

Forms of Tax shifting

Shifting of Tax can be done

  • Either by increasing the price of the product
  • Or by lowering the quality of product

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