PUBLIC ECONOMICS (CC-13) TUTORIAL

SEMESTER 6
By GROUP – 15
MEMBERS:-
1. TANISHA SHARMA
2. ANIMESH KUMAR SINGH
3. ASARAR AHMED
4. RISHAV VERMA
 TOPIC :-

TAX INCIDENCE
AND
ASSOCIATED BURDEN
What is Tax Incidence?
■ A tax incidence describes a case when buyers and sellers divide a tax burden.
■ A tax incidence will also lay out who bears the burden of a new tax, for
instance among producers and consumers, or among various class segments
of a population.
■ The elasticity of demand of a good can help understand the tax incidence
among parties.
■ Tax incidence reveals which group—consumers or producers—will pay the
price of a new tax. For example, the demand for prescription drugs is
relatively inelastic. Despite changes in cost, its market will remain relatively
constant.
NATURE OF TAX BURDEN
■ TAX BURDEN AND RESOURCE TRANSFER
RESOURCE TRANSFER
If the tax revenue collected from
the private sector by the
government is spend to provide
public services, The burden of
tax must be accompanied by the
benefit of public services which
must be allowed to derive the net
gain of the entire transaction.
NO RESOURCE TRASNFER
The government simply collects
taxes from the private sector and
returns transfers to that sector.
Here, some may gain, others may
lose but tax equals to the
transfers and therefore there is
no change in income available for
private use.
MAGNITUDE OF BURDEN
■ It depends on the assumption that the tax burden must be equal to the collected revenue.

Excess Burden Input Effects

The total burden may exceed the revenue
collected because an efficiency loss or
excess burden results. As a result of this
additional burden, as referred to
deadweight loss, the consumer expenditure pattern
gets distorted.
Imposition of tax may lead to change
in factor supply, hence in total output.
That is, changes in output may result
Because of adjustments in factor inputs
in response to changes in after-tax
factor rewards.

Employment Effects

Changes in output because of resulting changes in the level of

aggregate demand and unemployment. Introduction of a tax
may reduce the level of employment or an increase in
expenditures may raise it.
CONCEPTS OF INCIDENCE
Statutory Incidence Shifting of Tax Burden
It is the initial distribution of
The transmission of burden from its
tax liabilities.
impact point (the place of statutory
incidence) to its final resting point (the
Economic Incidence place of economic incidence).
This process is known as
Shifting of Tax Burden.
It is the final distribution of
burden imposed on the
taxpayers, after the chain of
adjustments.
Types of Tax Incidence
■ ABSOLUTE TAX INCIDENCE
It examines the distributional effect of imposing a particular tax while holding
public expenditures constant.

■ DIFFERENTIAL TAX INCIDENCE

It examines the distributional changes which result if one tax is substituted for
another while total revenue and expenditures are held constant.

■ BUDGET INCIDENCE
It examines the changes in household positions which results if the combined
effects of tax and expenditure changes are considered.
Burden distribution among
whom?
Substitution of one tax for another will improve the position of some
households and worsen that of others. Changes in the position of any
one household may be measured in terms of the resulting change in its
real income. Real income may change because disposable income
changes or because there is a change in the price of the products
purchased.
Note that the disposable real income (DRY) of a household
may be defined as
DRY = (E-Ty)/(P+Ts) = DY/GP
where E = Earnings, Ty = Income tax, P = Price (at factor
cost) of products bought, Ts = Sales tax addition thereto, DY
is disposable or after-tax money income and GP is the
Gross (or Market) Price.
Burden Impact from Sources and
Uses Side
Sources Side Uses Side

Primary effects of tax changes which Primary effects which operate on the
operates on the earnings or sources side expenditure or uses side of its account
of the household account will change Ty. will change Ts. An increase in sales tax
Thus, an increase in income tax lowers lowers DRY via an increase in Ts and
DRY via an increase in TY and hence in GP. In addition, the general
hence a fall in DY. In addition, the general adjustment process may result in secondary
adjustment process may result in secondary changes from the uses side, or in P.
changes from the sources side, or in E.
Although such secondary effects may be of great importance to particular households,
chances are that they will not result in a systematic offset to such changes in the size distribution of
DRY as have resulted in line with the primary effects.
 Measuring Changes in
Distribution
A comprehensive measure of incidence may be
obtained by comparing the state of distribution
before and after a particular tax change.
Measuring the cumulative percentage of
disposable income on the vertical axis and
the cumulative percentage of households on
the horizontal axis, the curve OAB shows the
percentage of income received by the lowest
10, 20, 30, etc percent of households.
If the distribution was equal, curve OAB would
coincide with the straight line OB. Given a state
of unequal distribution, the ratio of two areas
OABC/OBC is taken as the index of equality.
Suppose now that the distributional pattern with
the existing tax system is as indicated by
0AB but due to tax change it becomes OA’B.
This means that distribution has become more equal
– since OA'BC/OBC>OABC/OBC,
hence an effect of progressive tax change occurs.
However, the total effect on distribution depends
not only on the extent of the progressive nature of
particular taxes but also on the overall
level of taxation and the underlying distribution
of income. A high but moderately progressive level of
taxation may have a greater impact upon the
distribution of income than does a low-level but
sharply progressive system.
REFERENCES :-
■ Class Notes
■ Public Finance in Theory and Practice, 5th Edition,
by Richard A. Musgrave and Peggy B. Musgrave