Importance of Incidence of taxation
The study of incidence is very important. The tax system is not merely aimed at raising a certain amount of revenue, butt the aim is to raise it from those sections of the people who can best bear the tax. The aim, in short, is to secure a just distribution of the tax burden. This obviously cannot be done unless an effort is made to trace the incidence of each tax levied by the State.
Importance of Incidence of taxation
The study of incidence is very important. The tax system is not merely aimed at raising a certain amount of revenue, butt the aim is to raise it from those sections of the people who can best bear the tax. The aim, in short, is to secure a just distribution of the tax burden. This obviously cannot be done unless an effort is made to trace the incidence of each tax levied by the State. We must know who pays it ultimately in order to find out whether it is just to ask him to pay it, or whether the burden imposed on him is according to the ability of the tax-payer or not. If the tax system is to conform to Adam Smith's first canon of taxation, viz., the canon of equality, it becomes imperative to make a careful study of the reactions and repercussions of each tax and find out its final resting place.
There are certain taxes, called direct taxes, which are borne by the people who pay them first. The incidence in such cases is apparent. But the tax system of a country is not merely composed of direct taxes. There are indirect taxes also whose reactions are a complicated affair. These taxes are intended to be shifted. Hut in actual practice, on account of economic friction, the shifting may not take place at all or it may be partial, or the tax may be shifted on to a class of people quite different from those intended to bear it.
If Public Finance is to serve as an instrument of social justice, the question of incidence at once assumes great importance. The rich have to be taxed and the proceeds have to be spent for the benefit of the poor. If you have to tax the rich, the incidence must be on the rich, otherwise the object is not served. We must, therefore, follow each tax and make sure that it finds a rich home to rest in.
The incidence of income tax paid by a person will be on him. Import duty is an indirect tax and can, therefore, be shifted. Income-tax, on the other hand, is a direct tax and it cannot be shifted.
Incidence of Tax on Monopoly
An interesting problem of incidence is provided by the taxes on monopoly income. When buyers or sellers form themselves into a monopolistic combination, then the general propositions of incidence require some modifications.
Where a tax imposed on commodity, whose seller is a monopolist, the effect of the tax upon the price of the commodity and, therefore, its incidence is according to the character of the tax. Assuming that the monopolist will fix his price so as to secure for him the maximum monopoly profits possible, then the incidence of a tax, the total amount of which is proportionate to the volume of his output or, more generally the total amount of which increases as his output increases, will, except in the unlikely event of either supply being absolutely inelastic or the demand absolutely elastic, be to raise the price of the commodity to some extent and, other things being equal, the rise in the price will be greater, the less elastic the demand and the more elastic the supply.
If, however, the tax is one, whose total amount is independent of the size of the monopolist's output, it will not raise the price and its incidence will be wholly on the monopolist. Chapman establishes the rules of incidence in the case of a monopolist as follows:
"A tax of a lump sum on a monopoly rests entirely on the monopolist provided his output is so arranged that his net takings are maximized; as it would tend to be in the absence of any limitations on his liberty. If in this event he is taxed Hs. 1,000 a year whatever his output, on reducing his output, he would meet with additional loss."
— A tax on the output probably induces the monopolist to restrict his output and thus some of the incidence would be on the consumer.