Taxes Levied Indirectly

Taxes Levied Indirectly

Taxes levied 'indirectly' on commodities are paid initially by businesses. Their effect is to drive a 'wedge' (the thickness depending on the size of the tax) between the price paid by the buyer and the price received by the seller. Which of these two gives way most depends upon the relative elasticities of demand for the product and supply of factors used in the production of the commodity. In the short run such taxes may be borne entirely by the business, but this is not likely to persist. A business is essentially an intermediary between consumers and factors of production. It will either pass on the tax to buyers if it can or it will find output less profitable and reduce it and so reduce also its demand for the factors of production. If the factors have few or no alternative uses their prices will fall and thus some of the burden of the tax will be passed on to them: if they are versatile (so that their supply is elastic) they will move to other uses and will carry little or no share of the tax.

The shifting process is essentially circular since in the end all taxes are paid by persons who are both owners of factors (their own labour) and consumers of products. If taxes are shifted by sellers on to consumers in higher prices, consumers as sellers of labour can in turn shift burdens forward again In higher wages . Or if taxes are shifted backwards on to factors in lower rewards, factors (as consumers) can shift the burden back again in lower demands for products. One of the tasks of tax shifting studies is to indicate the 'weak links' in the chain where the circle may be broken and the ultimate incidence of a tax may lie at least in part and for a tine. The importance of the analysis is that it shows that people may not pay all or even part of a tax levied on then but that they may pay all or part of a tax not levied on then. The incidence is often very different from the immediate 'impact'.

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