Lecture 3

Taxation

Professor Dr. Mohammad Main Uddin

Tax Burden

A tax burden refers to the total amount of tax that

individuals or entities are required to pay to the
government. It represents the economic impact of taxes on
taxpayers, including individuals, businesses, or other
entities. The tax burden can be measured in various ways,
such as the total amount of tax paid, the percentage of
income paid in taxes, or the overall impact of taxes on an
individual's or entity's financial situation.
Tax Impact and Tax Incidence

The first resting point for a tax is its tax impact, and the
last resting point for a tax burden is its tax incidence.
Tax impact is what happens to the person from whom
the tax is collected, whereas tax incidence reveals who
is responsible for paying the tax.

The final tax burden is known as tax incidence, and the

initial tax burden is known as tax impact. The tax
incidence is on the person who eventually pays it, and
the tax impact is on the person who collects the tax.
Below we have discussed the impact
tax and incidence tax:
* Tax impact refers to the initial burden of tax when the
tax incidence tells about the ultimate burden of the tax.
* The tax incidence occurs at the point of settlement
when the tax impact is at the point of imposition.
* The impact of the tax falls upon the person for whom
the tax is collected, and the tax incidence falls upon
the person who pays it.
* The tax impact can be shifted but tax incidence can’t.
Effect of Taxation

The effects of taxation cover all the changes in the

economy, resulting from the imposition of tax system.
Imposing of taxation has certain inputs on the
production, consumption investment, employment and
similar other patterns. Its presence distorts these
patterns and such distortions may be called effects of
taxation.

According to Dalton, taxation effect can be studied by

grouping it in the following Categories.
(A)Effects of taxation on production.
(B)Effect of taxation on distribution.
(C)Other effects of taxation.
Tax Shifting

Tax shift is a kind of economic phenomenon in which

the taxpayer transfers the tax burden to the purchaser
or supplier by increasing the sales price or depressing
the purchase price during the process of commodity
exchange. Tax shift is the redistribution of tax burden.
Tax may be shifted forward and
backward.
In case of forward shifting of tax a supplier is able to
pass additional tax to the consumer through the
increase in price of a commodity. Forward shifting of
tax is possible where the demand of a commodity is
inelastic i.e. the responsiveness of demand to changes
in price is proportionately lower e.g. in case of goods
such as beer wines and spirits or cigarettes.
• Backward shifting of tax occurs where the producer is
unable to pass an increase of tax to his consumers
but instead he negotiates lower purchase prices with
the suppliers of factors of production. Backward
shifting of tax occurs where the demand of a
commodity is elastic i.e. the responsiveness of
demand to changes in price is greater proportionately
e.g. in case of goods with substitutes such as soaps,
detergents, cooking fat, milk etc.
Thank You