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.
What is the difference between impact of tax and incidence of tax? The impact of tax refers to the way the introduction of taxation, or the raising of tax levels, on a particular product or service, affects the way the product or service is used.
The introduction or increase of tax, for example, usually results in the product or service being purchased less often. As a result, the impact of tax, or tax impact, is usually negative for the development of an economy, as it hinders and reduces spending, which is necessary for the growth of an economy.
On the other hand, the incidence of tax refers to the people who carry the burden, for want of a better word, of tax. For example, if you own a large portion of land, but your neighbor owns a small portion of land, and tax on land goes up, you would be said to be part of the population subject to the incidence of tax.
These taxes are shared equally between the employer and the employee - however, many economists feel that the employee bears a higher incidence of tax, as employers will usually lower wages if taxes are increased.
This would mean that, not only will the employee have to pay half of this tax, but their wages will also be reduced. Therefore, a simple way of describing the difference between the impact and the incidence of tax would appear as follows: The incidence of tax relates to the effects upon the people who pay the taxes, while the impact of tax relates to the effects upon the goods and services which are taxed.
It could be argued that the two are linked, as if taxes on goods and services are raised, the impact of tax would mean that less people pay for them - as a result, the government and other large bodies have to find a source of income other than VAT, and therefore other taxes may be raised, effecting the incidence 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).
What is the difference between economic incidence of a tax and legal incidence of a tax? What is the impact of tax and incidence of tax? In the U.S., what is the difference between income tax and salary tax?
Impact and Incidence Distinguished. We may distinguish between impact and incidence.
The impact of the tax is on the person who pays it in the first instance and the incidence is on the one who finally bears it. Dalton distinguishes between incidence and effects of taxation by putting that incidence are the direct money burden of a tax while its effects are the indirect money burden.
ADVERTISEMENTS: Mrs. Ursula Hicks, on the other hand, talks of formal and effective incidence of a tax.
Tax incidence refers to how the burden of a tax is distributed between firms and consumers (or between employer and employee). The tax incidence depends upon the relative elasticity of demand and supply.
Tax shifting refers to the transfer of the burden of tax from the impact to the incidence. This may be through forward shifting or backward shifting. Forward shifting refers to an instance whereby a seller transfers the tax charge to the consumer.