Tax incidence determines which group pays a tax, with some taxes passed on to other groups. Each step in the chain adds to the tax burden, with one group usually paying the majority. Corporate product taxes often fall on retailers or customers, but in some cases, the burden may occur further up the chain.
In some circumstances, it is possible to pass on the cost of a tax to another group; the tax incidence establishes which group actually pays a tax. This process follows a tax from its origin through all economic strata to the final payer. In many cases, it is a person who has removed several steps from the effective tax who bears the greatest burden.
While it may appear that the person paying the tax bears the tax burden, this is not always the case. Some taxes are levied against a particular group but, instead of paying those taxes, it passes them on to another group. A person who pays the effective tax, the one who fills out the forms, pays a nominal tax incidence. This form of tax incidence is rarely the last step in the process.
Typically, a person passes their expenses onto others whenever possible. If a tax is levied on a manufacturer, it passes on the extra cost by increasing the price. If the company that uses the goods for a finished product then has to pay more, raise the price. The goods will then go to a retailer who is suddenly paying more for an in-stock product. The reseller will either accept the increased price or pass it on to their customers.
Each such step is a separate link in a chain. While the initial persona had a nominal tax burden, it was only the first link. Each venue, including the first, probably paid a small amount of tax. Even so, one group almost always pays the majority. This group is the real payer of the tax.
Typically, a corporate product tax falls on a retailer or customer. Manufacturers and suppliers raise the cost of their share of the product to account for the new price. A retailer must determine whether its customers will purchase the product at a higher cost; if they don’t, the dealer pays the fee. If the retailer thinks people will still buy the product at a higher price, the customer pays for it.
This cascade system is not always in action. In circumstances where the product is available from many sources, the tax is local, or the good is seasonal or perishable, the tax burden will occur further up the chain. For example, if a person grows oranges and a county government imposes a tax on oranges, the grower would probably have to pay it himself. Since oranges can come from many locations and not all have the tax, the grower would need to keep his prices low to remain competitive. Since the commodity is perishable, the grower cannot afford the luxury of stocking up on oranges until prices have leveled off.
Smart Assets.
Protect your devices with Threat Protection by NordVPN
