Question

2. Explain What could happen to market prices when a tax is introduced or changed?

3. What are the effects of tax incidence on individual income taxes, payroll taxes, excise taxes, and corporate taxes.

Answer 1

There are expectations that the tax reform will boost the economy and huge shift will be seen from unorganized to organized sector.

However, some near term the market will have ups and downs in the process of adoption of taxes or any changes in that.

• Fast moving consumer goods sector will benefit from the taxes due to the present of big unorganized market.
• Consumer durable items there are expectations that with taxes coming in picture, there will be some increase in the prices.
• Health care and Pharmacy products the prices will remain constant, because if there is any increase the impact should be passed on to patients. However, the inputs of the sector may be fluctuated which leads to rise in operating cost.
• From the investor’s perspective, in case of long-term investor’s, this may not be too significant since the overall shift is just about low basis points. However, for short term traders, this even low basis points additional cost will change the economics of churning their funds in the markets.
• Telecom and automobile sectors having severe pressure in the form of intense competition in the market the price increase will further dampen the scenario.
• Real Estate sector will face the impact of taxes which will be further shifted to ultimate consumers in the form of increase in property prices.

In conclusion, introducing taxes or changes in tax result in distributional effects, profits of producers,

Shareholders, farmers, real estate etc. ultimately effects the market prices.

Effects of incidence of tax: Incidence means the final resting place of a tax.

• In case of individual income taxes incidence is on the man who ultimately bears the money burden of the tax.
• Large positive incentives like encourage work, saving, and investment.
• Payroll taxes, in the form of mandatory contributions by employers, are used in most developed and developing countries to finance the provision of pensions, healthcare benefits for disability and maternity, and compensation for work injuries for employees.
• The contrast in payroll taxes and other mandated contributions and unemployment rates
• Excise tax is a tax on specific commodity. The incidence of excise tax is on the ultimate consumer. Even the ultimate incidence is on the consumer it should be collected from the producer which will reduce the production.
• Effect of excise taxes is decrease in the quantity of the item that consumers demand due to increase in the price due to impact of excise tax. This makes tax highly regressive
• The Incidence of corporate tax is to be falls on the owners of capital or on the labor employed by the firms.
• Encourage domestic investment by lowering the marginal effective tax rate on new investment.
• Working in the same direction was the elimination of the corporate Alternative Minimum Tax.

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