Essays on Tax Incidence, Tax Burden, and Tax Shifting in Tobacco Industry Assignment

Tags: Tax
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The paper “ TTax Incidence, Tax Burden, and Tax Shifting in Tobacco Industry” is a worthy variant of the assignment on finance & accounting. Excise tax is a government tax and is indirectly levied on a product. Raising the excise tax or putting an excise tax on a product will raise the price of the product as it directly gets reflected in the price of the product. For example, if the government imposes excise duty on cigarettes then the price of cigarettes will increase thereby reducing the equilibrium quantity and increasing the equilibrium price.

This is seen belowIn the above diagram, we see that when the government levies an excise duty of $2 per cigarette box it gets reflected in the price as the price of cigarette increases by the same proportion making the price to be $8. The increase in price makes the consumer spend more on the consumption of cigarettes which thereby pushes certain sections of the population to reduce their spending on cigarettes. This causes a decrease in demand of the product thereby decreasing the equilibrium quantity to Q2 from Q1.

This theory clearly follows the law of demand which states that as the price of goods rises the demand for the product falls and vice versa. This is a phenomenon that is visible in low and middle-income countries where the population is more price sensitive. (World Bank, 2010) It is also evident that the younger generation who are more prone to cigarettes are price sensitive so an excise duty helps to reduce smoking and ensure that the demand for cigarette falls. Raising the excise duty on cigarettes puts an extra burden on both the consumer and the producer as they both have to pay the additional taxes.

The load of the extra burden borne either by the producer or consumer depends upon the price elasticity of demand. If the demand for a cigarette is more elastic than the burden has to be borne mostly by the producer as shown below. It is seen in the above diagram that when the demand is more elastic the burden of tax is borne by the producer. This is seen from the fact that the fall in quantity demanded from Q1 to Q2 is much higher compared to the rise in price from P1 to P2.

As a result, the producer has to bear the major chunk of the taxes.

References

Bhaskar V, 2007, “The competitive effect of price floor”, The Journal of Industrial Economics, Volume 25, Issue 3, page 329-341

Cummings K, 2002, “Policies and programs to discourage the use of tobacco products”, Oncongene, Volume 21, Number 48, pg 7349-7364

Entin S, 2004, “Tax Incidence, Tax Burden, and Tax Shifting: Who really pays the tax”, retrieved on January 8, 2011 from http://www.heritage.org/research/reports/2004/11/tax-incidence-tax-burden-and-tax-shifting-who-really-pays-the-tax

Licari M & Meier K, 1997, “Regulatory policy when behaviour is addictive: Smoking, Cigarette Taxes and Bootlegging”, Political Research Quarterly, Volume 50, No 1, 5-24

Price floor, 2010, “Price Floor retrieved on January 8, 2011 from www.economics.fundamentalfinance.com

World Bank, 2010, “Measures to reduce the demand for tobacco”, The World Bank Group, retrieved on January 8, 2011 from http://www1.worldbank.org/tobacco/book/html/chapter4.htm

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