INCIDENCE OF TAXATION
INCIDENCE OF TAXATION
This is referred to as the final resting place of tax burden. The incidence of tax involves the process of transfer from the person on whom tax is imposed initially to the ultimate tax payers who bears the money burden of the tax. It is on the person who actually pays the tax . For direct tax, the incidence is on the tax payer. In the case of indirect tax, the t’s burden may be difficult to determine.
TYPES OF INCIDENCE OF TAXATION
1 Formal Incidence: This refers to the final effects of tax on the tax object I.e, the tax payer. It shows where the initial burden of taxation lies. For the direct tax, the initial burden of taxation is borne on the payer. The producers or manufacturers bear the initial burden of tax in case of indirect taxes.
2 Effective Incidence: This refers to who bears the final burden of taxation. With reference to direct taxes, the payer bears the full (initial and final) burden of taxation. For instance, a person who pays income tax bears the full burden of tax and he can not shift it to another person. For indirect tax, the burden of taxation is borne by the producer or the consumer or shared between them.
To know the person that bears the burden under indirect tax, the elasticity facing the product should be consider or determined.
1 Perfectly Inelastic: The entire burden is borne by the consumers if the demand for the commodity or service is perfectly inelastic. For such goods or services, the quantity demanded does not change even if the price increases.
Price S2
P2 A S1
S2
P1 B
S1
0 Q0 quantity sssFrom the fig above, the initial quantity supplied is S1. When tax was imposed, supply jumped to S2 and price increased from P1 to P2. The tax paid is represented by AB. Moreover, the quantity demanded remains at Q0. Increase in tax does not affect the quantity demanded of any commodity with perfectly inelastic demand.
2 Perfectly Elastic: The burden of imposition of tax is on the seller. Perfectly elastic means irrespective of change in quantity demanded price remains unchanged.
Price
S2
S1
B A
P
S2
S1
O Q2 Q1 quantity
The seller cannot increase the price. If he should do so, the demand may fall to zero. The burden of tax cannot be shifted to the consumers. Increase in tax will increase the cost of production and since he cannot increase price, the quantity will reduce to Q2 from Q1. The pre-tax price is PA. After the imposition of tax, the supply is S2. At S2, the new price is PB which is the same thing with the old price.
3 Elastic Demand: The incidence of tax is borne more by the seller and less by the buyer. Here, both of them are affected.
From the fig below, the producer bears CD as burden while the buyer bears AC. So, the burden is more on the producer than consumer.
Price S2 S1
D A
P2
C B
P1 D
S2 S1
D
0 Q2 Q1 quantity 4 Inelastic Demand: Here, the burden is more on the buyer and less on the seller. When the price rises, it will not have much effect on the demand of goods.
Price D S2
P2 a
S1
P1 b c
S2 D
0 d S1
Q2 Q1 quantityWhen price is increased for goods with inelastic demand, consumers’ demand fairly affected. Therefore, consumer will bear more burden as they cannot do without consuming the good. From the fig above, the consumer bears AB and the producer bears BD.
5 Unitary Demand: For unitary demand, the burden can be shared equally between the seller and the buyer.
price D a S2
S1
b c
S2 D
S1
0 d quantity
Q2 Q1EFFECT OF TAXATION
It affects savings as high tax reduces marginal propensity to save
It encourages inflation when there is full employment. That is, increase in indirect tax will encourage inflation as there will be increase in price of such goods.
It affects the disposable income of the consumer
It is used to reduce the consumption of goods that are dangerous to health.
High tax rate affect the cost of production by decreasing the volume of goods in the market.
It increases the level of government revenue
Heavy tax on the profit of business organisation may discourage investment.
It could lead to the company relocating to other countries if the tax is too high.
SPECIFIC TAX
This is a fixed rate of tax imposed per unit of a commodity regardless of its price. Specific tax is levied on a commodity according to the quantity purchased. Example is tobacco tax. It is regressive in nature.
ADVALOREM TAX
This is levied on the value of the commodity. It is proportional to the value of the object being fixed.
TAX EVASION AND TAX AVOIDANCE
Tax evasion is a deliberate means of reducing the tax payable by making a false tax return or failing to make a return at all. Tax payer can achieve the minimization of tax through illegal means.
Tax evasion may be achieved by
1 Understanding of income
2 False tax return
3 Omission from returns or changeable income
4 Overstating expenditure
Tax avoidance is a situation whereby the tax payer arranges his financial affairs in a form that would make him pay the least possible amount of tax. It occurs when a tax payer takes a legal course to keep down the amount payable as tax.
Differences between Tax Evasion and Tax Avoidance
Tax Evasion Tax Avoidance1 It is an illegal act It is a legal act
2 It result in non-payment of It results in payment of minimum tax
Correct tax
3 Evaders can be charged to No criminal liability
Court
4 It is possible through fraud It is possible through exploiting the
Action purposely loopholes in the tax system
DIFFICULTIES ENCOUNTERED BY TAX COLLECTORS IN NIGERIA
The cost of collection if its high could affect The principle of economics
Most tax payer usually declares false income
Proper books of accounts are not properly kept by many traders and business men
Government officials mismanage tax revenue by corrupt enriching themselves
The high level of poverty in the country could be a deterrent to tax payer
Ignorance of the importance of tax