Economic Incidence of an Excise Tax Imposed on Consumers
PRICE
S
Pc
Pe
b
Ps
d
c
a
D
DTAX
Qtax Qe
QUANTITY
Economic Incidence of an Excise Tax Imposed on Suppliers
PRICE
S’TAX
S’
Pc
Pe
Ps
f
g
e
h
D’
Qtax’ Qe’
QUANTITY
Economic Incidence of an Excise
Tax Imposed on Consumers
Economic Incidence of an Excise
Tax Imposed on Suppliers
PRICE
S’TAX
Pc
Pe
Ps
S’
S
f
b
c
a
g
d
e
h
D’
D
DTAX
Qtax’ Qe’
Qtax Qe
QUANTITY
PRICE
Economic Incidence of an Excise
Tax Imposed on Consumers When
Demand Is Relatively Price Inelastic
Pc
b
Pe
c
Ps
d
S
a
DTAX
Qtax Qe
QUANTITY
D
Note: When demand
is relatively price
inelastic for a good or
service on which an
excise tax is placed,
consumers bear a
larger portion of the
economic burden of
the tax. For example,
it is highly likely that
smokers do not
greatly reduce the
quantity of cigarettes
they smoke as the
result of a tax-induced
price increase.
Therefore, smokers
(consumers) bear
most of such a tax’s
economic burden.
Economic Incidence of an Excise
Tax Imposed on Consumers When
Demand Is Relatively Price Elastic
Note: When demand
PRICE
S
Pc
Pe
Ps
b
c
a
D
d
DTAX
Qtax Qe
QUANTITY
is relatively price
elastic for a good or
service on which an
excise tax is placed,
suppliers bear a larger
portion of the
economic burden of
the tax. For example,
consumers DO likely
reduce the quantity of
imported bottled water
they drink as the
result of a tax-induced
price increase.
Therefore, suppliers
would bear most of
such a tax’s economic
burden.
Taxes: Who Really Pays?
The statutory incidence [legal liability] of a
tax falls on the entity that is legally
responsible for remitting the tax revenues to
the taxing jurisdiction (government).
The economic incidence [economic burden]
of a tax falls on the entity (or entities) that
incurs economic costs as a result of the tax.
Tax shifting refers to the phenomenon in
which the economic burden of a tax is borne
by an entity other than the one on which the
statutory incidence falls.
How Taxes May Be Shifted
Taxes whose statutory incidence falls on
businesses will always be shifted away from
the business. A tax imposed on business
will be shifted:
forward to the consumer in the form of higher
prices for the goods and services they buy,
backward to the owners of the business in
the form of lower return on investment or to
the employees of the business in the form of
lower wages for the their labor, or
some combination of these.