Impact of taxation:

Taxation on goods, income or wealth influencing economic behavior and the distribution of resources. For example higher taxes on carbon emissions will increase cost for producers, reduce demand and shift demand towards alternatives. Higher income tax can enable redistributors of income within society but may have an impact on reducing the incentive to work and supply labor. The impact, incidence and shifting of tax are as.

Taxation can have an impact on many aspects of economy including Labor supply, labor productivity, economic growth, inflation, production and consumption of goods, saving, rates consumption, income distribution, resources distribution level of government spending

 The other impacts of taxation are:

• Raise revenue for the government: The main purpose of taxes is to raise income for the government which can lead to higher spending on health care and education. The impact depends on what government spends the income on.
• Less discretionary income: Those paying income tax will be left with less discretionary income to spend after income tax has been deducted. This is likely to lead to lower level of household saving however if the government spend the tax revenue over all aggregate the man will not be affected.
• Incentive effect: Higher income tax reduces that take home pay and can reduce the incentive to work either workers chaos not to do over them or even leave the labor market all together however there are two conflicting effects of higher Taxes.
• Substitution effect: Higher tax leads to lower wages and work becomes relative fewer alternatives than leisure. The substitution effect of higher taxes is that workers will want to work less.
• Income effect: However, if higher tax leads to lower wages than a worker may feel the need to work longer hours to maintain his target level of income. Therefore the income effects means that higher tax may mean some worker feel the need to work longer. This means there is no guarantee of the impact of higher tax. it depends weather the substitution effect is greater than the income effect.

Overall taxes are levied on individuals or business units. People have to pay the taxes this is called impact. The impact of the tax falls on the person who pays tax in the first instance. The impact of a tax is therefore, the immediate result of the imposition of a tax on the person who pays the tax in the first instance.  Impact of a tax therefore refers to the immediate burden of the tax and not be ultimate burden of the tax.

Incidence of tax:

 Incidence of a tax refers to the money burden of a tax on the person who ultimate bears it. In other words, when the money burden of a tax finally settles or comes to rest on the ultimate tax payer it is called incidence of tax. The incidence of a tax remains upon that person who cannot transfer the burden of tax to any other person, that is who ultimately bears it. The transferring process of burden is called as shifting of a tax.

Traditionally, incidence of a tax has come to mean the final or ultimate resting place of the direct burden of a tax payment. it refers to the point at which the tax check in finally comes to roost or taxation of the ultimate or direct money burden of the tax as such.

Among the earlier writers Dalton was responsible for bringing of the real nature of incidence and for distinguishing it from the effect of a tax to every shifting of revenue raised, their correspondence Shilling of direct money burden or incidence falling up on someone. according to him the problem of incidence is to discover the person of persons ultimately pays this on shilling.

Dalton believes that the imposition of a tax leads to two type of burden on the people that is money burden and real burden. Money burden refers to the amount of a tax contribution which has to be made by the tax payer to the government the real burden of a tax, according to Dalton relates to the sacrifice which the imposition of tax entails on the tax payers.

Shifting of tax:

It is a kind of economic phenomenon in which the tax payer transfer the tax burden to the purchaser or supplier by increase the sales price or depressing the purchase price during the process of commodity exchange. Tax shift is the redistribution of tax burden.

Taxes may be shift in several directions

• A forward shift tax is a tax imposed on producer but passed on to consumers. The amount of a tax shifted forward depends on the price elasticity of demand for the taxed goods.
• A backward shifted tax is a tax borne by firms and input suppliers. the amount of backward shifting to input supplier depends on their responsiveness to change inputs prices.
• Forward shifting takes place if the burden falls entirely on the user, rather than the supplier of the commodity or service in question example: an excise tax on luxurious that increase their price to the purchaser. backward shifting occurs when the price of the article taxed remains the same but the cost of the tax is born by those engage in producing it, example: through lower wages and salaries lower prices for raw material or lower return on borrowed capital.

Factors determining tax shifting;

• elasticity of demand and supply
• nature of markets
• government policy on pricing
• geographical location
• nature of tax
• rate of tax
• time available for adjustment
• the tax point

also read: explain the merits and demerits of indirect tax.