Incidence of Tax - Residential Status and Scope of Total Income, Income Tax Laws Video Lecture | Income Tax Laws - B Com

hi folks mr. pepper here with you again
we are going to spend this video talking
about a concept called incidence of
taxation or tax incidence and see how
that concept relates to the concept of
elasticity essentially what we're going
to be figuring out here is when the
government imposes an excise tax or a
per unit tax we're going to try to
figure out how much of that tax is
ultimately paid for by the consumer how
much of that is ultimately paid for by
the producer so when we say incidence of
Taxation we're basically talking about
the burden of Taxation how much of a
particular tax is paid for by
individuals and then how much of that is
going to be paid for by consumers unless
we're dealing with the situation of
perfect elasticity of supplier demand or
perfect in elasticity of supply or
demand the amount of a per unit tax is
going to be partially paid by both
producer and consumer and in most
instances worldwide it's the producer
that collects the tax and then it will
send the proceeds of this per unit tax
on to the government so let's do some
analysis we're going to take a look at
just a normal market and when I impose a
per unit tax what I'm doing is I am
placing an increase amount of price on
each individual quantity that is
available for sale so what that looks
like then is a shift of the supply curve
now it isn't there hasn't been any
change in supply all we've done is we've
increased the price of every unit
available for sale in the market by the
vertical distance of the tax so these
red arrows would represent the per unit
amount of the tax and so when we label
our new supply curve we're going to
label it supply but including
tax and so this again this red vertical
distance here between s and s plus tax
is the per unit amount of the tax so if
this happens then we really have the
establishment of a new market price and
market quantity where the S Plus tax
curve intersects with the demand curve
at Point a p2 then will be our new
market price and q2 will be our new
market quantity note that market
quantity has fallen from Qi to q2 I also
want you to make note of something else
take a look at the vertical distance
here which is the per unit amount of the
tax and then what I want you to do is
compare that vertical distance to the
vertical distance associated with the
change in the market price from P
initial to p2 it looks like the value of
the tax is greater and that is indeed
the case so what this means then is that
the consumers have paid some of that per
unit tax but it is also the producers
that have paid another portion of it
which underscores the idea that for any
excise tax or per unit tax the burden of
the tax is going to be shared among
producers and consumers let's see how
that really looks then and this further
announced the diagram Point C is
important for us to establish because it
allows us to get a an idea of the price
that the producer is going to be able to
keep I found Point C by taking a look at
the new market quantity and where that
market quantity bisected this the
initial supply curve and I made a note
of that price this is the price that the
producer gets to keep as a result of the
sales now he's ultimately collecting
price p2 but remember
he has to deliver some of that the
proceeds of the each sale to the
government in the form of Taxation so
he's going to pass P 2 minus P 3 this
amount off to the government he's going
to be able to keep the rest so this pink
shaded area then represents the burden
of the taxation of the incidence of
Taxation that's paid for by the consumer
the market price initial market price
and then it's the new market prices so
it's the consumer that's been paying
that per unit increase times all the
units that have been for sale which is 0
Q 2 and so this rectangular shaped area
represents the burden of Taxation the
incidence of Taxation on the consumer to
find the tax burden on the producer
again we take the market price and we
find the difference between the market
price and the amount that the producer
gets to keep and again we have another
kind of revenue box here and that that
gray shaded area box represents the
burden on the producer if we were to
take this together right this
rectangular area that's bounded by P 3 C
a and P 2 we would get the total amount
that's paid to the government after
being collected by the producer I want
you to make a note of something else if
we were to I were to ask you what the in
the original total revenue that was
collected by the firm before the
imposition of the tax was hopefully you
would say well that was zero Q initial B
and P I and so we would have this
rectangular shape revenue box after the
imposition of the tax I want you to take
a look at the new revenue that the firm
gets to keep after the tax has been
imposed 0 Q 2 now because sales have
dropped
see and P 3 because it's P 3 that is the
price that the producer gets to keep so
this revenue box is noticeably smaller
so we've seen for the firm the result in
of it really any any tax is going to be
probably a fall in total revenue now we
have another area here the
triangular-shaped area bounded by ABC
triangle what is what is that well
that's a fishin C loss because we've
passed this particular tax we've lost
Society has lost some amount of consumer
surplus and some amount of producer
surplus when we combine that total we
call that either a total loss of
efficiency or deadweight loss to society
so this is a great graph so we need the
basics of how to figure out the
incidence of Taxation the next thing we
have to do is see how this concept of
incidence of Taxation affects or is
impacted by elasticity and so really
what we're going to figure out is the
incidence of an excise tax or a per unit
tax given different elasticity's of
supply and demand we're going to start
with a case of inelastic demand first
and note that I've drawn a very nice
steep steeply sloped demand curve to
indicate relative and elasticity when I
pass my tax remember it looks like a
shift in the demand curve or supply
curve not really but that's what it
looks like and remember that the
vertical distance between s and s plus
tax is the per unit amount of the tax so
I'm going to label that s plus tax I'm
going to make a note of where that that
tax intersects my demand curve that's
going to be my new market price note the
increase of P initial to p2 and likewise
the decrease in the quantity demanded
from Q initial to q2 that's not a big
drop in demand
sorry quantity demanded now I need to
figure out the price that the consumer
gets to keep
line that again where the new market
quantity intersects the initial supply
curve and this is p3 here and this
analysis shows me that with inelastic
demand it is the consumer that is going
to bear most of the tax burden and that
is indicated by the pink shaded area the
producer's tax burden is represented by
the gray shaded area you see that that
is relatively smaller you know why is
that it's because our consumers cannot
change their buying patterns as a result
of the increase in price and so they're
going to shoulder the burden of the tax
increase we still have some degree of
deadweight loss or loss of efficiency to
society and I've noted that in my orange
triangular box let's take a look now at
the case of elastic demand so you'll see
now that I've drawn a nice shallowly
sloped demand curve I'm going to pass my
tax I'm going to label the new curve s
plus tax I'm going to make a note of
where that tax intersects my demand
curve going to establish my new market
price in my new market quantity note
that in this particular case that the
market quantity is followed by quite a
great bit the next thing I need to
figure out is the price that the
producer gets to keep p3 and I note then
that the taxation burden in this
particular case with any letter with
elastic supply has not fallen as much on
consumers as it has fallen on producers
why is that it's because the demand is
elastic and that means that consumers
are sensitive to prices changes and that
they've had the ability in this case to
probably substitute out of consuming
this particular good or service and that
then leaves the producers with varying
the burden of the taxation we still have
in fact quite a great deal in this
particular case of deadweight loss or
loss of efficiency to society
now let's take two more cases first case
in elastic supply I've drawn a nice
steeply sloped supply curve to find the
tax I'm going to shift my supply curve
up by the amount of the per unit tax
label my new supply curve s plus tax
find out where that tax intersects my
demand curve and established a new
market price in a new market quantity
then I have to figure out the amount of
price that the consumer gets to keep or
sorry the producer gets to keep and in
this particular case I note that it
looks like it is going to be the
consumer that gets off with the lighter
tax burden and it's going to be the
producer that is going to pay bear the
brunt of this particular tax why is that
it's because the producer cannot make
any supply changes as a result of the
imposition of the tax and so he's going
to be stuck with bearing most of the
burden of that taxation we still have
some degree of inefficiency a deadweight
loss to society and again I've indicated
that in orange last one case of elastic
supply so I've drawn a nice shallowly
sloped supply curve here I'm going to
shift the supply curve what looks like a
shifted supply curve s plus tax the
vertical distance between those two
curves again represents the per unit
amount of the tax I find out where that
tax intersects the demand curve and I
establish a new market price in quantity
at p2 and q2 respectively then I want to
take a look at the price that the
producer is ultimately getting to keep
here at p3 I now know that relatively
speaking it's going to be the consumer
that bears most of the burden of this
taxation relative to the consumer why is
this that's because of elastic supply
and as a result of the imposition of the
tax the producers been able to make some
changes fairly quickly and that means
he's able to shift out of producing this
particular good or so
and produce something else oh it's going
to leave the consumer with a pain the
brunt of this particular tax note again
the deadweight loss to society because
of the imposition of the tax at triangle
ABC so what do we learn here well really
five things I guess the biggest thing is
that the concept of incidence of
taxation or tax incidence is highly
related to the concept of elasticity we
also have four situations that you might
want to commit to memory in the case of
inelastic demand its consumers that
can't change their buying patterns and
so they're going to pay the burden of
the tax with respect to inelastic supply
it's the producers that cannot change
their production capabilities and their
production possibilities and so they're
going to pay the tax burden with a case
of elastic demand consumers can change
and so it's going to be then the
producers that pay the tax burden with
the case of elastic supply its producers
that can change and so it's the
consumers that are going to pay the tax
burden so I hope it's clear how these
two concepts are related look forward to
seeing you soon bye