Question

Managerial Economics, and the Market Forces: Demand and Supply:

Please consider examples of taxes that are paid largely by consumers? What about those that are likely to be paid by producers? Explain within 300 words why the person who pays is different from who is responsible for sending the tax money off to the taxing authority.

Thanks!

Answer 1

A tax is a compulsory charge or levy that is imposed on an individual by the government. Governments often collect various types of taxes and use this money for their expenditure activities. Usually it is seen that the government imposes tax on the seller who tries to shift the burden on to the buyer. Sellers usually shift the burden of taxation to the consumers. How much of a burden is shifted depends on the elasticity of demand for the commodity.  

An example of a tax that is levied on the consumers and paid by them is user fees. This is the charge levied on utilities and services like toll roads.

Examples of taxes which are levied on the producer/seller but transferred to the consumer are:

1. Sales Tax- This is levied on the purchase of goods and services. Many economists believe that these are very equitable as consumers only pay them if they consume the good.

2. Excise Tax- This is another form of indirect tax levied on the consumption of certain goods and services like alcohol.

The consumer usually pays these taxes to the seller and it is the seller who has to pay all the amounts to the government. The person who the tax is levied on (producer) is different from who pays it is because all these are examples of indirect taxes and in such kind of taxes, the incidence is on the producer but the burden falls on the final consumer. But the sellers do not transfer the whole burden to the consumers. The tax incidence depends on elasticity of supply and demand.