reduction in the tax for both buyer and seller of cupboard will affect demand and supply of wooden cupboards? explain with table and diagram
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Answer:
Taxes are an important source of revenue for the government. However, taxes decrease both supply and demand in the market, because buyers have to pay a higher price and sellers receive a lower price for their product. Sometimes the government tries to divide the burden of the tax, such as the federal government does with the payroll tax, requiring both employer and employee to pay ½ of the tax which is 15.3% of wages paid.
However, do employers and employees actually pay only ½ of this tax? After all, if employers have to pay ½ of the payroll tax, then they can simply pay their workers less to compensate for their share of the tax. On the other hand, laborers can decide not to work for less than what they want to earn plus the burden of the payroll tax. As will be seen from considering the supply and demand and their elasticities, the actual tax incidence, defined as the actual burden that each transaction participant shares, cannot be mandated by law, but depends on the respective elasticities of both supply and demand on the taxed product.
better see how the elasticity of supply and demand affects tax incidence, consider a 20% tax on a can of soda. Suppose the government decides that the buyer should pay the 20% tax. Does this mean that the buyers will be paying 20% more, or will sellers have to share some of the tax burden? Since higher prices decrease demand, regardless of why, sellers will share some of the burden. How much of the burden will be determined by the elasticity of supply and demand for the product.
Only if either demand or supply was either completely elastic or inelastic will the tax burden fall entirely on either the buyer or the seller. Between these 2 extremes, tax incidence varies continuously from a perfectly inelastic supply or perfectly elastic demand, where the sellers assumes the entire burden of the tax to the perfectly elastic supply or perfectly inelastic demand where the buyers bear the entire burden. As can be seen in the diagrams below, the tax burden will fall more on the buyer if demand is inelastic or supply is elastic, but will fall more on the seller if demand is elastic or supply is inelastic.
Diagram showing how the tax incidence on buyers and sellers depends on the elasticity of both supply and demand.
Answer:
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