Question

To raise revenue, a city is planning to impose a $5 tax per ticket for tickets to music concerts held in the city. The mayor is deciding between two ways of implementing the tax policy. The first way is to collect the $5 tax per ticket from the concert performers (the producers of concerts). The second way is to collect the $5 tax per ticket from the concert-goers (the consumers of concerts). An assistant to the mayor says the first way makes producers bear a greater share of the tax burden from this tax policy while the second way makes the consumers bear a greater share, so the mayor should think about whether she cares more about the producers or the consumers in making this decision. Is this advisor’s advice based on sound economic reasoning?

Answer 1

Ans) Statutory incidence of tax means that upon whom the tax is imposed i.e from whom the tax is collected.

While the economic incidence of tax means who really bears the burden of tax or in what ratio is the burden of tax split between consumers and producers.

When government imposes tax, it does not really matter upon whom the tax is imposed (i.e Statutory incidence), burden of tax is shared by both buyers and sellers (economic incidence). Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

So, government can impose tax on whatever side it wishes to, economic incidence of tax will remain same. That is, if demand is relatively less elastic then buyers will bear greater burden of tax. While if supply is relatively less elastic then sellers will bear greater burden of tax.

So, No the advice of advisor is not based on sound economic reasoning.