Inequalities and Tax Incidence
Tax systems are crucial in ensuring equal redistribution of wealth. I take this opportunity to talk about incidences and tax inequalities. Tax inequality occurs when a higher burden of tax is passed to a particular group than the other. For instance, there has been a tendency whereby, the rich are subjected to heavy taxes than their poor counterparts. In doing so, public spending is focused on benefiting those with less ability to pay taxes. Tax inequality may cause what is known as the incidence of taxation. A tax incidence is an economic term for the division of a tax burden between buyers and sellers.
Tax Incidence determines the amount of tax burden shared amongst the consumer and seller during an exchange of service or product. For instance, if the seller has bought a product for say $ 20 and she is levied a tax of $ 4 , if she sells that product for $ 24 to the consumer, then total tax burden is passed on to the consumer. Usually, tax incidence is dictated by the aspect of supply and demand of the product in relative to its price. Now, if the demand for a good is high, the consumer will have to carry the entire tax burden. For example, the rise of cigarette price is not going to affect its demand. Thus, the producers will pass the tax burden to the consumers.
Meanwhile, Increasing the tax burden on the wealth individuals may help to facilitate programs that are of benefit to the poor households. However, such an approach may lead to slow economic growth. For instance, those bearing the highest tx burden may fail to comply with the tax policy. They might avoid investing too. Although the well-off citizens already pay a substantial share to government revenues, raising the tax rate may fasten the reduction of inequality.