Question

Describe the difference between the legislative burden of a tax and the economic burden of a tax. Using the model of demand/supply illustrates the impact of a tax on goods or service, identifying the price consumers pay, the price producers receive, and the total tax revenue generated by the tax. Using the model of demand/supply illustrates the impact of a tax on goods or service, identifying the change in consumer surplus, the change in producer surplus, the total tax revenue, and the dead weight loss generated by the tax.

Answer 1

Legislative tax burden is the party on which the tax is imposed, who will pay the tax to the government. Economic tax burden is the effective tax amount that is shared between the buyer and the seller.

In following graph, D0 and S0 are demand and supply curves intersecting at point E with equilibrium price P0 and quantity Q0. Consumer surplus (CS = area between demand curve and price) is area AEP0 and producer surplus (PS = area between supply curve and price) is area BEP0.

Now let us assume a tax is imposed on sellers. This will shift supply curve leftward to S1, intersecting D0 at point F. Price paid by buyers increases to P1, price received by sellers decreases to P2 (where P1 - P2 = unit tax) and quantity decreases to Q1. CS decreases to area AFP1 and PS decreases to area BGP2. Government collects tax revenue equal to P1FGP2. Finally, deadweight loss is area EFG.

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