Difference between formal and effective incidence of tax economics essay

Read more Tax incidence The relative burden, or incidence, of an indirect tax is determined by the price elasticity of demand PED of the consumer in response to a price rise. If the consumer is unresponsive, and PED is inelastic, the burden will fall mainly on the consumer. However, if the consumer is responsive to the price rise, and PED is elastic, the burden will fall mainly on the firm.

Difference between formal and effective incidence of tax economics essay

What is the Meaning of Incidence of Taxation? When a tax is imposed on some person, it is quite possible that it may be transferred by him to a second person, and this tax may be ultimately borne by this second person or transferred to others by whom it is finally borne.

Thus, the person who originally pays the tax may not be actually bearing its money burden as such.

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This problem is, therefore, to determine who bears the tax, ultimately. This is known as incidence of taxation.

Difference between formal and effective incidence of tax economics essay

Dalton, for instance, considers incidence as the direct money burden of tax on the person who ultimately pays it. Incidence, thus, rests on the person who cannot shift the money burden of the tax to any other person.

Dalton distinguishes between incidence and effects of taxation by putting that incidence are the direct money burden of a tax while its effects are the indirect money burden. Ursula Hicks, on the other hand, talks of formal and effective incidence of a tax.

The direct money burden of a tax, she calls it formal incidence, while effective incidence is considered to be the economic effects of the tax in a broader sense.

Hicks, the calculation of formal incidence is useful in assessing the question of redistribution of income through taxation. It may also be helpful in economic planning. However, the exact reaction of tax payers to a change in tax or the economic repercussions of a tax cannot be directly ascertained by a mere estimate of the formal incidence.

Musgrave, however, speaks of specific tax incidence and differential tax incidence of a budget. Specific tax incidence is one when the pattern of distribution changes due to the imposition of a new tax or by changing the rates of existing taxation, keeping public expenditure and other budgetary phenomena unchanged.

Differential tax incidence refers to change in the distribution pattern in the economy caused by substituting one tax for another, total tax revenue being unchanged. It is pointed out that taxation by itself does not cause a reduction in real income available for private use; it is public expenditure that absorbs real resources.

Taxes may be increased or reduced for any number of reasons without changing the level of real public expenditure. Taxation only changes the distribution of income and the incidence of taxation should accordingly be defined as the change in the distribution of real income available for private use.usual to distinguish between the legal incidence 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. Effective, or final, incidence refers to who actually ends up paying the tax; if, for example, the. Difference Between Formal Effective Incidence Of A Tax Economics Essay.

Home / Economy Essays / The ‘incidence ‘ of a revenue enhancement refers to who bears the load of the revenue enhancement. We can separate between two types of revenue enhancement incidence: formal incidence, significance who is lawfully obliged to pay the revenue.

Mrs. Ursula Hicks, on the other hand, talks of formal and effective incidence of a tax. The direct money burden of a tax, she calls it formal incidence, while effective incidence is considered to be the economic effects of the tax in a broader sense.

The incidence of a tax The economic incidence, or burden, of a tax indicates the extent to which someone is made worse off by the tax. In contrast, the statutory incidence simply indicates who the law says will pay the tax.

Incidence of taxation and expenditure. The incidence of taxes is a subject that has generated much academic debate. It is usual to distinguish between the legal incidence 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.

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 of Taxation: What is the Meaning of Incidence of Taxation?