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Who Really Pays Tax?
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Who Really Pays Tax?
Taxation is a primary source of revenue for the government, where citizens are obligated
to pay either directly or indirectly. Indirect tax is not obtained from the source but through
purchasing various goods and services. As a result, consumers of goods and services in ordinary
markets are primary payers of tax. Revenue targets influence government intervention in
ordinary markets and can encourage or discourage taxpayers. Markets with an inelastic demand
curve benefit the government more since substantial price increments result in a negligible
change in the quantity demanded (O'Sullivan et al., 2012). A tax policy that prompts increased
product prices in such markets will raise more taxes. For example, healthcare equipment
commonly used in a particular jurisdiction will retain the same demand despite high prices due to
taxation.
A tax policy that drives prices high in a market with elastic products experiences a
substantial decrease in demand for goods and services. As a result, consumers prefer substitute
products since they forego the highly-priced goods. The government misses out on that revenue
target, thus creating a deadweight loss from taxes (O'Sullivan et al., 2012). The scenario explains
why raising tax rates does not always increase government revenues. For example, raising rent
rates can significantly affect landlords when tenants have easy access to construction materials.
Consumers for ordinary goods and services pay a significant tax, particularly when the products
lack substitutes. High tax rates on luxury businesses may not raise substantial revenues as
perceived. Taxing luxury businesses commonly triggers layoffs for employees, resulting in a
significant loss of target revenues. The government ought to balance subsidies and tax policies to
attain efficiency in revenue collection through taxes.
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References
O'Sullivan, A., Perez & Sheffrin, S. M. (2012).4Microeconomics: Principles, applications, and
tools. Pearson Education.
