Taxation

Today, we will be discussing why the tax is levied on producers, consumers, or both, how the tax affects supply and demand, how the tax affects equilibrium price and quantity, and reasoning when a price ceiling or floor could be imposed. We will then talk about the implications it would possibly have on the market. So, let’s begin with the first question. The first question we will be discussing is, “Is the tax levied on the producers or consumers'” The answer is that the tax is levied on both the producers of the goods and the consumers who buy them. This creates assort of double tax situation. As read in a taxation article I found via the web, by an unknown author, the government has standardized the tax levy, this way the double taxation would occur which ends up maximizing the potential of the government’s financials. Now just because the tax is levied directly on a business doesn’t mean the business will pay this full tax. Ultimately it will be paid by real people, not just consumers through steeper prices and business owners through reduced profits or reduced salaries. The main reason why governments levy taxes is so they can cover the costs of their expenses that need to be paid off. These Taxes do affect supply and demand in the following ways; producers pay these taxes, so it ultimately raises the cost of the final product, lessening the want for the product by consumers because some people might not be able to afford it and will choose to pick a similar alternative product at a lower price. For example: Say a consumer loves going to this little Italian place down the street, but the taxes raised on their products recently and for the business, so the business raised the price of most of the main courses on the menu. This consumer might decide to go to Hy-Vee and buy their own ingredients to make Italian dishes for their family because it will ultimately be cheaper for them. This is the affect taxes can have on both supply and demand. The tax also affects the equilibrium price and quantity significantly. Like we discussed earlier, taxes end up increasing costs of production for the producers. This is because the producers would require much more to produce the given unit of that product. In turn, the quantity supplied of that product will decrease because of the increase in the costs of production. The producer has to compensate him or herself by adding an additional amount of the tax to the supply price. This is another example of how the producers and consumers share the increase of tax. The consumers will then pay the tax by paying increased prices for the goods or services provided. When the market re-gains equilibrium with this new higher equilibrium price it will in turn lower the equilibrium quantity. So basically what this boils down to is the higher tax increases the equilibrium price and reduces equilibrium quantity, while the reduction of taxes decreases the equilibrium price and raises the equilibrium quantity. Finally, let’s discuss, hypothetically, where a price ceiling or floor could be imposed in this market. From what I have read online, if the price ceiling is set below equilibrium, there will be a shortage which will lead to a downward spiraling economy and the fall in quantity of goods. If a price ceiling is set above equilibrium, then there will really be no effect to a price ceiling. Now if a price floor is set above equilibrium, then it will cause a surplus, which will lead to goods that aren’t made as efficiently because they are being produced by the masses. If a price floor is set below equilibrium, it won’t really have an effect. I retrieved this most of this information from an article by Dwight Lee, written December 1998, called Price Floors, Surpluses, and the Minimum Wage. This article can be easily accessed on website www.thefreemanonline.org. References Author Unknown.(February, 2010).Tax Efficiency.Retrieved March 16, 2010, from website: http://www.amosweb.com Author Unknown.(2006).Price Floors and Ceilings.Retrieved May 16, 2010, from website: http://www.econport.org Combs, S.(August 1, 2009).The Nature of Tax.Retrieved May 16, 2010, from website: http://www.window.state.tx.us Lee, D.(December 1998).Price Floors, Surpluses, and the Minimum Wage.Retrieved May 16, from website: http://www.thefreemanonline.org Leonhardt, D.(April 10, 2009).Richly Undeserved.New York Times Magazine.Retrieved May 16, 2010, from website: http://www.nytimes.com/2009/04/12/magazine/12wwln-lede-t.html'_r=2&ref=magazine