Taxation

TAXATION ECO/205 Autumn Justice Taxation, whether it is local, state or federal, has always been an area of immense interest to economists and financial analysts. One question is who is the actual taxpayer- the producers or the consumers- or who bears the majority of the tax burden. Roach (2007), argues that “Taxation is as much a political issue as an economic issue”. Politicians have been introducing tax reforms to “promote their agendas”. In this paper, most of the arguments are presented from material from two articles- Tax Incidence, Tax Burden and Tax Shifting: Who Really Pays The Tax' And Taxation in the United States. Tax is usually considered as a stimulant for the economy. It is believed to ignite “economic growth” as it can encourage “desirable behavior” and discourage “unwanted behavior”. (Roach, 2007). If the government, whether local, state, or federal, wants to curb alcohol drinking in the country, it would tax the companies in the alcohol industry. The price of alcohol would rise as a portion or a major part of the tax burden levied on the organizations would be passed on to the consumers. In addition to an increase in manufacturer’s recommended price, the government could impose a high sales tax; therefore, dissuading the consumers from buying alcohol. On the other hand, if the government wants to promote a good, such as vitamin water, it would lower corporate as well as sales taxes. When the corporate tax is low, the manufacturer’s recommended price would also be low and then the sales tax on it would be lower as well. This way, the government can encourage people to use vitamin water. The questions which arises here is whether taxation is a means to stabilize economy, boost economic growth and at the same time, ensure fair and equitable distribution of the nation’s wealth. Roach (2007) expresses that although taxation is generally thought of “a means to redistribute economic resources towards” “low income” and less privileged people of society, its reality maybe different and in fact, somewhat bitter. It is true that no one ever “wants to pay taxes”. The grave state of affairs is that “Tax policy clearly reflects the expression of power in the U.S”, that is, “those without power or favor are left paying more in taxes while others reap the benefits of lower taxes because of their political influence” (Roach, 2007). Roach (2007) further addresses that “Broad attempts to reform the tax system have produced dramatic and sudden shifts in tax policy, generally motivated by political factors rather than sound economic theory”. (Entin, 2004). The economists agree on one point that the “current tax system imposes heavier taxes on income used for saving and investment, and on the formation of human capital, than on income used for consumption”. In such a situation, consumers tend to overspend and under save. Therefore, it can be said that the ultimate consumer of the product bears much of the burden. (Entin, 2004) Entin (2004) asserts that the elasticity of demand and supply actually determines who shoulders the incidence of tax. He stated that the “relatively elastic demand for labor, coupled with the assumption of a highly inelastic supply of labor, means that labor bears most of the initial economic incidence of taxes on labor income”. (Entin, 2004) It has become common to assert that all taxes on labor income fall on the worker, including the employers’ share of the payroll tax, the employees’ share of the payroll tax, the unemployment compensation tax, and the portion of the income tax that falls on wages and salaries. The market forces always work to keep the price and quantity of a good in equilibrium. Tax incidence disturbs the established equilibrium but the market forces of demand and supply tend to bring the price and quantity into equilibrium again at another point. However, the affect of tax and market forces is depends on the elasticity’s of demand and supply, which tend to be “greater” in the long run and minor in the short run. The reason for this is that people need time to get them adapted to the change in tax policies. When tax on gasoline prices rise, people tend to drive less or use public transport in the short run. However, in the long run, they would purchase fuel-efficient cars. Price ceiling is imposed on a good by the government in order to prevent prices from rising very high. Basically, this helps in making the product affordable by customers. The ceiling could be set above or below the equilibrium price, which is determined by market forces of supply and demand. (“Government Intervention: Price Ceiling”) If the ceiling imposed by the government is above the “market-determined equilibrium price”, it has no impact on the price of the good. Generally, in such cases, the market or the industry is unable to produce a good at the ceiling price. However, the consumers may suffer, as they are required to pay a price higher than the one determined by market forces. (“Government Intervention: Price Ceiling”) If the “government-imposed” price is below the equilibrium price determined by market forces, the supplier and the consumer, both, are affected. The supply decreases, as the producers cannot supply the demanded quantity at the given price. The demand rises because of the low price. (“Government Intervention: Price Ceiling”) Conclusion It is generally believed that the consumers bear most of the tax burden. The suppliers pass on their tax through a high price while the government imposes a sales tax on them. References Entin, Stephen J. (2004). A Report of The Heritage Center for Data Analysis – Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax' Washington, D.C.: The Heritage Foundation. Roach, Brain (2007). The Encyclopedia of Earth - Taxation in the United States. Retrieved August 30, 2009 http://www.eoearth.org/article/Taxation_in_the_United_States College-Cram.com -Government Intervention: Price Ceiling. Retrieved August 30, 2009 http://www.college-cram.com/study/economics/presentations/634.