The direction and extent of tax shifting
One key concept essentially governs the direction and extent of tax shifting:-
The extent to which the user of a tax item can avoid paying taxes depends on how simple or challenging it is to locate non-taxable or less-taxable replacements for the tax object; The easier it is to identify comparable non-taxed or less-taxed alternative employment possibilities for this element, the more the provider of a production factor that is taxed or employed in the manufacturing of a taxable good can escape the tax burden. You should visit section 12a.
Prices of alternative items may rise as a result of rising demand, which will benefit their manufacturers and raise the tax burden placed on people who used them prior to the imposition of the levy. A portion of the burden will fall on those who supplied the productive elements in those industries before the tax was implemented since such factors will often obtain lower returns in other employments if they attempt to evade the tax.
For instance, if beer is taxed but wine is not, the tax burden will fall on those who own the land used for viticulture as well as the people who work in the industry if these two alcoholic beverages are thought of as exact equivalents and the price of a beer does not grow with rising demand. If the soil is suitable for producing grapevines and if workers have access to alternative job opportunities, the burden will rest mostly on the landowners.
On the other hand, the majority of the tax burden will fall on wine consumers if they are committed to solely drinking wine. Both wine and beer drinkers would be affected if there were some substitution of beer for wine, and those who had resources specifically specialised in producing beer would profit.
The income effect must be considered in addition to the substitution effect already covered. As a result of having less money to spend, consumers will consume fewer specific products and services (as well as leisure activities) when taxes lower real income.
The demand for different items, the supply of labour, and the demand for different resources will all be impacted by income redistribution if a tax results in a considerable redistribution of real earnings and if different income levels have distinct saving and consumption tendencies.
Although they arise from the fundamental idea of substitution, other factors can have an impact on tax shifting. Depending on how long it takes to change consumer habits, redistribute capital and land, retrain labour, etc., the degree of shifting may change over time. The biggest burden will fall on those providers and users who find it hardest to adapt.
Tax incidence is influenced by the size of the tax base. It is more challenging to avoid paying taxes the wider the tax base or the more comprehensive the tax is since there are fewer alternatives that are not taxed or have lower tax rates.
As a result, although a tax on all alcoholic beverages would prevent this, an excise tax on only a handful of them would allow it to be avoided by a change in consumption habits. The taxation of corporate earnings alone will have a smaller impact on returns on capital than the taxation of corporate and noncorporate profits.
See the content on 80g deduction.