Question

. Assume that the capital-labour ratios are identical in all sectors of the economy. What factors would determine the incidence of a tax on the output of a particular sector?

Answer 1

Answer : Tax incidence means the burden of imposed tax who finally bears . The factors which determines the tax incidence in all sectors are following :

(i) Elasticity : If the product has elastic demand then there is no chance to bear the tax incidence by the buyers. In this case tax incidence bears sellers and vice versa.

Again if the supply is inelastic then producer bears the tax incidence but in case of elastic supply tax bears buyers.

(ii) Time : In short run time period supply is inelastic and hence tax bears sellers. But in long run time period the opposite condition occurs.

(iii) Cover tax : If tax is imposed on all subtitute products and on the original product then the burden of tax can be transferred to buyers. But if tax is imposed on single product then it is not possible to transfer the tax to buyers . In this case the burden of tax bears sellers.

(iv) Market structure : If the market is monopoly then there the tax burden bears buyers. Because monopoly is a market price controller.

If the market is monopolistic then there also tax burden bears buyers. Because in this maket few sellers exist who has a power to control the price level as the selling products are differential.

If the market is perfectly competitive then also tax bears buyers. Because producers raise the price level after tax impose. And hence competitive sellers sell the products at that price which the company decide.

(v) Types of tax : If the tax is indirect tax then there is a chance to transfer the tax to others like custom duties, sale tax etc.

If the tax is direct tax like income tax then there is no scope to transfer the tax incidence to others.