who pays more tax?

Is it the buyers or the sellers? 

What we generally think is,  it depends on whom the tax is levied. If the tax is levied on the buyers of goods and services,  they are worse off and will have to pay more tax. While on the other hand, if tax is levied on the sellers, sellers will have more share on the pay of tax.

But is this actually what happens in the economy?

The concept of taxation is not as simple as it seems. Practical application of taxation is way different from what people assume. Whenever, the tax is levied on a good or a service, be it on a seller or a buyer, the burden of tax is shared by both,  buyers and sellers. And, this concept of economics is known as TAX INCIDENCE. This concept may not seem obvious to many people. So let’s take an example to understand how it works. We see the effect in three steps;

– Whether it will affect supply side or demand side.

– Whether the affect will be positive or negative.

– How in total will it affect the economy.

Now, suppose the tax is levied on buyers. Say, a tax of 10% in levied on movie tickets. Looking at affects, let’s go step wise;

– A tax on buyers, will affect the demand side.

– The affect will be negative, as it will lead to fall in the demand of movie tickets. Thus, shifting the demand curve to the left.

– This shift to the left,  will decrease the price on movie tickets, as sellers will be ready to sell them at lower price.

This simply states that, though buyers are directly paying the tax to the government. But the burden of tax is shared by both, buyers pay more for the good,  and sellers receive less.

Similarly,  in the case when taxes are levied on sellers,  the burden gets distributed between buyers and sellers.

Hence, taxes discourage market activities. After the tax, the total number of goods sold decreases. However, the proportion in which they share the burden,  depends on their respective elasticity.

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