Question

Select the correct statement regarding commodity (or excise) taxes.

A) Regardless of who writes a check to the government, the burden of commodity taxes is shared equally by buyers and sellers.

B) From the perspective of buyers, taxes imposed on firms are preferable to taxes imposed on buyers because firms ultimately pay a larger share of these types of taxes.

C) The burden of a tax is unrelated to who actually writes the check to the government.

D) The reduction in consumer and producer surplus associated with a commodity tax is equivalent to the tax revenue collected.

Answer 1

Option A: The burden of a tax is not equally shared by the buyer and seller. Rather, it depends on the elasticity of demand and supply. If elasticity of demand is low, the producer would shift the burden to the buyers because they would still buy the commodity at higher prices as well. If not, he would bear most of the burden himself. Therefore, Option A is incorrect.

Option B: Whether or not firms pay a large portion of this tax or not depends on elasticities of demand and supply. If tax was levied on consumers, it could ultimately lead to lowering of prices by the seller to stimulate demand. Therefore, the actual burden is borne by the producers if the demand is elastic. Option B is incorrect.

Option D: Besides the loss in consumer surplus and producer surplus, there is an additional loss to the society in the form of deadweight loss. Implimentation of a tax includes this loss to the welfare of the society, and hence Option D is incorrect.

Option C: If the tax is levied on sales and demand is inelastic, the producer would easily shift the burden of the tax to the consumer. Similarly, if a tax levied on consumers leads to a drastic decrease in demand (i.e. demand is elastic), the producers would reduce prices and bear the burden of the tax.

It is clear that the one writing the check does not necessarily bear the burden of the tax. Therefore, Option C is the correct statement.