Question

What is meant by tax incidence? How does this concept apply to who actually pays a sales tax? Illustrate your answer graphically to show how a sales tax can be evaluated.

Answer 1

Tax incidence is the division of tax burden between the buyers and sellers. The division of tax burden actually does not depend upon who ends up paying the tax. This is because ultimately the tax burden is shared irrespective of on whom it is imposed. The share of tax burden determined by the elasticity of demand and supply. When the demand is more elastic than supply, producers will be paying a greater burden of the tax. Similarly when supply is more elastic demand, consumers will be paying a greater burden of tax.