Question

Hi please assist with the following questions regarding excise taxes,

1. Assume that the government has imposed a tax on the production and sale of pickup trucks in America. In what cases would that tax be absorbed more by consumers than manufacturers and vice versa?
2. Under what circumstances would you expect the total excise tax to be borne by a consumer rather than by the producer? Or by the producer?
3. Assume that the government imposed a 100% luxury tax on new yachts purchased in this country. Who would pay more for this tax, the sellers or the buyers? Do you think this tax would increase tax revenue?

Answer 1

Question 1

Burden of tax depends on the respective elasticity of demand and supply.

If demand is inelastic while supply is elastic or the demand is less inelastic than the supply then the burden of tax would be greater on the buyers than the sellers.

On the other hand, if supply is inelastic while demand is elastic or the supply is less inelastic than the demand then the burden of tax would be greater on the sellers than the buyers.

Now, government has imposed a tax on the production and sale of pickup trucks.

If the demand for pickup trucks is inelastic while the supply of pickup trucks is elastic then the tax would be absorbed more by consumers than the manufacturers.

On the other hand, if the supply of pickup trucks is inelastic while the demand for pickup trucks is elastic then the tax would be absorbed more by manufacturers than the consumers.