Context: The Union government recently said Goods and Services Tax (GST) has decreased tax incidence on the common man.

Tax Incidence

• About: It is an economic term describing how the burden of a tax is shared among various stakeholders, such as buyers and sellers or producers and consumers.
• Two Forms of Tax Incidence: 

o Initial Incidence: This refers to the legal obligation of taxpayers to remit tax payments to the government, as established by law.

o Final Incidence: This refers to the actual burden of the tax on economic welfare in society, affecting consumers, workers, and investors.

• Example of Incidence Shift: For corporate income taxes, the legal incidence is on companies, but the economic incidence is often passed on through higher consumer prices, lower wages, or reduced shareholder returns.
• Tax Shifting: The difference between initial and final incidence is known as tax shifting, where the actual economic burden of the tax may differ from the legal obligation.
• Impact of Price Elasticity: The incidence of a tax depends on the price elasticity of supply and demand. Elastic goods see a larger tax burden shift to producers, while inelastic goods shift the burden to consumers.
• Tax Incidence on Inelastic Goods: For inelastic goods, such as cigarettes, consumers bear the tax burden since they continue to buy the product despite the price increase.
• Tax Incidence on Elastic Goods: For elastic goods, producers bear more of the tax burden as the demand decreases with higher prices, leading to a lower shift in the tax incidence to consumers.