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WEEK 10
TOPIC: Balanced and Unbalanced Budget
CONTENT:
- Incidence of Taxation
- Meaning of balanced budget
- Reasons for balanced budget
- Meaning of surplus and deficit budget
- Ways of financing deficit budget and their effects (e.g., debt burned, debt relief, debt buy back)
INCIDENCE OF TAXATION
Incidence of taxation refers to who bear the burden of tax i.e. who finally pays an imposed tax. For direct tax, the burden is borne by the income earner or the tax payer. But for indirect tax, it may be difficult to determine who actually bears the burden of taxation. This depends on the elasticity of demand for the commodity which is taxed. The burden of taxation may be borne by the producer/seller or the consumer or shaved between them.
- Incidence of indirect tax when demand is perfectly inelastic: The entire burden of tax is shifted on consumers via higher prices since demand will not be affected i.e., quantity demanded remains the same. This illustrated thus:
In the figure above, the tax is represented by MN. This tax increases the producer’s cost of production. Since the same quantity is bought irrespective of the price, producer increases the price of the commodity from to . The consumer bears the full tax burden represented by
(ii) When demand is perfectly elastic, the producer or seller bears the whole burden of taxation. This is because any increase in price may make demand fall to zero.
From the figure above, the tax is represented by MN. Since the tax increases the cost of production, it reduces the supply from to . However, the price remains at OP since any attempt to increase price will make demand to drop to zero. The producer therefore bears the entire burden of tax represented by RNMP.
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