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Application - The Costs Of Taxation

 Application - The Costs of Taxation

Application of Tax

            Taxation has such a chief brunt on the modern economy and the upshots of taxes on well-being might at first seem apparent. The statute ratifies taxes to raise revenue and that revenue must come out of someone’s hands. Both consumers and vendors are worse off when a commodity is taxed.

        A tax raises the cost consumers pay and lowers the price vendors get. The equipment of consumer and producers’ surplus let us make this comparison. This scrutiny will show that the cost of taxes to consumers and sellers surpasses the revenue raised by the statute.

The Deadweight Loss of Taxation

            It does not material whether a tax has been imposed on consumers or vendors of the commodity. When a tax is imposed on consumers the demand curve moves downwards by the size of the tax, when it is levied on vendors, the supply curve moves upwards by that volume.

            In both cases, when the tax is endorsed, the cost paid by the consumers hikes and the price obtained by the vendors drops. Ultimately, consumers and vendors allocate the burden of the tax, despite the consequences of how it is imposed.

            The Diagram 1 represents the consequences. To simplify our discussion this diagram does not show a movement in both the supply or demand curves even though one curve must move.

                                                Consequences of Tax

            Which curve moves is dependant on whether the tax is imposed on vendors (the supply curve moves) or consumers (the demand curve moves). Tax places a lodge amidst the price consumers pay and the price vendors get.

            As the tax lodge the volume traded drops below the limit that would be traded devoid of tax. In other terms a tax on a commodity causes the dimension of the market for the commodity to contract.

How A Tax Have An Effect on Market Participants

            The instruments of welfare economics is used to calculate the profits and losses from a tax on a commodity. To do this, we should consider how the tax influences consumers, vendors and the statute.

            The gain obtained by consumers in a market is calculated by consumers’ surplus – the cost the consumers are willing to pay for the commodity less the cost they originally pay for it.

            The gain got by vendors in a market is calculated by producers’ surplus – the cost vendors obtain for the commodity less their costs. They are accurate in the calculation of economic welfare.

            With regards to statute, lets assume the dimension of tax as TD and V the Volume of commodity traded, then the statute receives a aggregate revenue of TD * V. It can use this tax revenue to offer services such as lay roads, security, educational institutions or to assist the deprived.

            Hence to scrutinise how taxes influence economic welfare, we use tax revenue to calculate the statute’s gain from the tax. However this gain originally accrues not to statute but to those whom the revenue is spent.

                                                            Tax Revenue


            The Diagram 2 represents the statute’s tax revenue is denoted by the rectangle amidst the supply and demand curves. The tallness of this rectangle is the dimension of the tax T and the width of the rectangle is the volume of the commodity sold, V.

        As a rectangle’s area is its tallness times its width, this rectangle’s are is T * V which parities the tax revenue.

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