Question

Factors which govern the shifting incidence of a tax

Answer 1

Answer:

Apart from the elasticity of supply, power to transfer the tax burden depends on the-elasticity of demand for a commodity. The greater the elasticity of demand of the buyers, the smaller the extent to which the tax will be shifted to them.

Answer 2

Tax Incidence refers to the overall burden of tax which is a consequence of any direct or indirect tax.Tax incidence basically rests on the section of the society that bears the financial burden of the tax.

Explanation:

Factors governing shifting of tax incidence:

1. The type or nature of the tax:Now taxes are broadly classified as direct and indirect.Examples of direct taxes include income taxes, property or any type of wealth taxes.On the other hand,indirect taxes are taxes usually imposed on production and sale of commodities such as sales tax.Tax incidence of direct taxes is usually constant but in the case of indirect taxes, it varies.
2. Market Structure:Market structure refers to the nature or type of the market which can be classified as perfect competition,monopoly,monopolistic competition,oligopoly an so on.The structure or nature of market can determine the shifting or fluctuations of the tax incidence.For example, producers have limited control over the market supply resulting in limited ability to shift the tax incidence but in monopoly, with absolute control over the supply level,a producer can easily shift the tax incidence to his/her best advantage.Therefore, the increasing market competition ideally reduces the shifting power of tax incidence for the producers.
3. Elasticity of Demand:It indicates the responsiveness of the demand to a change in price of a commodity or service.Usually, the higher the elasticity of demand,lower the incidence of tax on the buyer or consumer of the product/service and vise versa.
4. Elasticity of Supply:It measures the responsiveness of supply of any product or service to a certain change in its price.The higher the elasticity of supply for a product/service,the higher the tax incidence or burden of tax on the producers or suppliers and vise versa.