Shifting of Taxes - Public Revenue, Public Finance | Public Finance - B Com PDF Download

Factor # 1. Elasticity of Demand:

Elasticity of demand affects the shifting process. If the taxed com­modity is having perfectly elastic demand price cannot be raised at all.

Hence the incidence will be wholly on the seller. On the other hand, when the demand is perfectly inelastic, the incidence will be wholly on the buyer. In between these two extremes, the incidence of tax will be shared by the buyer and seller.

Factor # 2. Elasticity of Supply:

Price is determined by the interaction between demand and supply of a commodity. Hence incidence of a tax will be fully borne by the buyer, when the taxed commodity is having perfectly elastic supply. Likewise, when the supply of a commodity is perfectly inelastic, the whole incidence will be on the seller.

Factor # 3. Price acts an Engine of Shifting:

Price act as a media of shifting. It is the vehicle, which carries money burden of tax from the point of view of legal liability. If the tax is shifted through a raise in price, it is called forward shifting. If the price cannot be rise, tax cannot be shifted. Hence the character of price flexibility is the most important factor that determines the shift- ability of a tax.

Factor # 4. Tax Area:

The nature of the area in which the tax is imposed also affect shifting of a tax. If the tax is imposed on a commodity, having local market, it will be difficult to shift the tax by raising the price.

In such a case, people can avoid the tax by purchasing a commodity from neighborhood market, where it is cheap. This also gives rise to smug­gling of commodities from non-tax levying locality to avoid taxes.

Factor # 5. Time Period:

Time factor influence the shift ability of a tax. In the short period supply is inelastic. Hence, during this period greater part of tax bur­den will be borne by the seller.

In the long-run, supply is more elastic. Hence, there is a better scope for shifting tax burden upon the buy­ers. Therefore, in the short period, shifting of a tax is difficult, where as in the long period it is easy to do.

Factor # 6. Coverage of Tax:

If the tax is general in character, falling on wide range of commodi­ties, it is easy to shift the burden.

For example, if the tax levied on tooth paste is general in nature, covering all brands and kinds, it will be readily shifted.

However, if a tax is imposed on one brand of tooth paste, excluding the other brands, it is not possible to shift the tax burden. So we can say that shifting of a tax is rendered easier in general tax than in non-general taxes.

Factor # 7. Availability of Substitutes:

Taxes imposed on a commodity having no close substitutes, can be easily shifted to the buyer. Here the buyer cannot find an alternative product as substitute to satisfy his demand.

Hence, he will be ready to purchase the taxed commodity by giving higher prices. On the other hand, if the taxed product has close substitute, shifting the money burden to buyers, is difficult.

Any rise in price due to tax will be opposed by the buyer, and he will go for the non-taxed substi­tutes. So the seller will himself bear the burden of tax, instead of attempting to shift it.

Factor # 8. Nature of Demand for Commodities:

By this, we mean whether the taxed commodity is falling under the category of necessaries, comforts or luxuries. The nature of demand is different for different commodities. In the case of necessary goods, demand is inelastic.

Hence the burden of tax is higher upon the buyer, than on seller. In the case of comforts, demand is more elas­tic, hence burden of tax will be divided between buyer and seller. Coming to the case of luxuries, demand is elastic. Hence the bur­den of tax is more on the seller. It cannot be easily shifted to the consumers.

Factor # 9. Business Conditions:

Shifting of a tax is influenced by the existing business condition in the economy. During periods of rising prices and economic prosper­ity, taxes can be shifted more easily. However, during periods of depression, forward shifting of tax liability is very difficult. Depres­sion is a situation of falling prices. Seasonal changes also will affect the shifting of tax.

Factor # 10. Types of Tax:

Shifting depends upon nature or type of tax imposed. If a tax is imposed on the excess profits of a firm under monopoly or imperfect competition, the incidence will not be shifted. On the other hand, if the tax is levied on the output of the firm, a part of incidence can be shifted on to the consumers.

Factor # 11. The Policy of the Government:

Shift ability of a tax is determined by the tax laws and public policy. In India, a tax law clearly indicates the price to be charged and to be printed on the product cover. For example, sales tax legislation stipu­lates that the burden of sales tax is to be borne by the consumers.

Likewise, government fixes maximum retail price and through law makers it binding to print it on the product. Then those who charge higher prices are legally punished. Hence, whenever a tax is im­posed the law abiding citizen will pay it rationally.

On the other hand, if prices are increased due to the attempt to shift some taxes to be paid by the seller, awareness of tax laws helps the consumer to resist it.

Factor # 12. Market Conditions:

Shifting of a tax is influenced by the conditions of market for the product taxed.