Indirect taxes are those imposed on goods and services, in contrast to direct taxes which are levied on incomes of households and firms, such as income tax there are two types of indirect tax specific and ad valorem the incidence of a tax the economic incidence, or burden, of a tax indicates the extent to which someone is made worse. Tax incidence is said to fall upon the group that ultimately bears the burden of, or ultimately has to pay, the tax the key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.
The formal incidence and effective incidence of a tax will often be different owing to the potential for the tax burden to be passed on through the operation of the price mechanism as will be shown below, the extent to which the tax burden can be shifted depends on a number of different factors.
As a result, tax foundation figures attempt to measure the economic incidence of taxes, not the legal incidence is the difference important for some states, the difference between legal and economic incidence is large for example, the state of alaska currently levies high severance taxes on oil extracted from the state. A tax incidence is an economic term for the division of a tax burden between buyers and sellers tax incidence is related to the price elasticity of supply and demand when supply is more elastic than demand, the tax burden falls on the buyers. Difference between formal and effective incidence of tax economics essay the 'occurrence' of the tax to who contains the responsibility of the duty refers we are able to differentiate between two kinds of tax incidence meaning who's legally required to pay for the tax, meaning who really contains the financial stress of the tax, and efficient incidence. Other articles where effective incidence is discussed: government economic policy: incidence of taxation and expenditure: of a tax and its effective, or final, incidence the legal incidence is on the person or company who is legally obliged to pay the tax.
In the uk context, one example of a tax where the effective incidence may differ substantially from the formal incidence is the national insurance contributions tax employees are required to pay national insurance contributions from the age of 16 until they reach state pension age, at a rate of 11% on earnings between £110 and £844 per week and 1% thereafter.
What is a 'tax incidence' a tax incidence is an economic term for the division of a tax burden between buyers and sellers tax incidence is related to the price elasticity of supply and demand when supply is more elastic than demand, the tax burden falls on the buyers if demand is more elastic than supply, producers will bear the cost of the tax.
The economic and statutory incidence are often very different the incidence of a tax on cigarettes - an example if the government puts an extra tax of £100 on each packet of cigarettes, the legal incidence is on the cigarette smoker.