Tax Distribusion

Tax Distribusion

  • Submitted By: mim1234
  • Date Submitted: 11/26/2013 6:41 PM
  • Category: Business
  • Words: 255
  • Page: 2
  • Views: 70

Many tax analysts argue that a fourth criterion should be added to the evaluation of any tax: its distribution or “incidence.” All taxes, after all, represent a diversion of some person’s or some business’s income to the government. And according to many analysts, governments often don’t adequately consider who (e.g., the producer or the consumer) ends up paying a particular tax and how this affects the overall economy; that is, they don’t pay enough attention to the incidence, or distribution and burden, of the tax.
Suppose for example, that the federal government responded to news of record oil company profits by imposing a new tax on oil imports and refining capacity – i.e., the producer of the oil. Its proponents might argue that the tax imposed an affordable and fair assessment on a thriving industry. But who would actually pay the tax? The oil companies? Or would they pass the tax, or at least a portion of it, on to consumers by charging more at the pump? The answer depends on the elasticity of demand for gasoline. If higher prices will not reduce the amount of gas purchased, the company will pass the tax on to consumers—in other words, if demand is inelastic, the incidence of the tax will be shifted toward consumers. But if higher prices at the pump will significantly reduce sales, the oil company will be forced to absorb more of the tax themselves—if demand is elastic, the incidence of the tax will remain primarily with the producer.

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