What are the different theories of tax shifting incidence?

By Ritesh|Updated : September 3rd, 2022

The different theories of tax shifting incidence are the Musgrave method, the diffusion theory, the concentration theory, and the demand and supply theory of incidence. Canard and Mansfield developed the diffusion theory.

Factors Affecting the Tax Shifting Incidence

Elasticity:

  • When calculating incidence, we take into account both supply and demand elasticity.
  • If the demand for taxable goods is elastic, the tax will often be passed along to the producer, but if the demand is inelastic, the tax will mostly be absorbed by the consumer.
  • The burden will typically fall on the buyer in elastic supply scenarios and the producer in inelastic supply scenarios.

Price:

  • Price is crucial because it is the only way to shift the tax burden.
  • The tax does not change if the price remains the same.

Time:

  • The producer cannot modify the plant or equipment in the short term.
  • Therefore, he may be unable to limit production and bear some of the tax if demand declines due to price increases brought on by the tax.
  • However, an adjustment can eventually be made, and the tax can be transferred to the customer.

Cost:

  • Taxes increase the price, which in turn decreases demand, which in turn lowers output.
  • Expenses are impacted by production scale changes, which vary depending on whether the industry has decreasing, increasing, or ongoing costs.

Summary:

What are the different theories of tax shifting incidence?

Canard and Mansfield created the diffusion theory. Four different ideas each explain the effect of tax shifting. The Musgrave method, diffusion theory, concentration theory, and demand and supply theory of incidence are among the theories.

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