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Theories of Tax Shifting

The document discusses two theories of tax shifting: 1) The Diffusion Theory states that over time it becomes impossible to trace where a tax ultimately falls as taxes diffuse throughout the entire economy through numerous market interactions. 2) The Demand and Supply Theory explains that tax shifting occurs through price changes and depends on the elasticity of demand and supply - taxes are more likely to be shifted to consumers for inelastic goods but borne by sellers for elastic goods.

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Namdev Upadhyay
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677 views1 page

Theories of Tax Shifting

The document discusses two theories of tax shifting: 1) The Diffusion Theory states that over time it becomes impossible to trace where a tax ultimately falls as taxes diffuse throughout the entire economy through numerous market interactions. 2) The Demand and Supply Theory explains that tax shifting occurs through price changes and depends on the elasticity of demand and supply - taxes are more likely to be shifted to consumers for inelastic goods but borne by sellers for elastic goods.

Uploaded by

Namdev Upadhyay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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THEORIES OF TAX SHIFTING

Theories of tax shifting

1. The Diffusion Theory


This theory states that eventually, it becomes impossible to trace the final incidence of any tax and that in
reality, all taxes get diffused in the economic system.
It is based on the assumption that the market is sufficiently competitive and that the factors of production
can move from one employment to the other quickly, easily and without significant costs.
Because of the constant interactions by sales/purchases transactions, a tax imposed at one place could shift
to all sectors of the economy thus becoming untraceable.

2. Demand and supply Theory

A tax may be shifted through sale/purchase transactions depending on the elasticity of demand and supply.
Shifting is through a revision of prices.
If the demand is inelastic, tax can easily be shifted by the seller to the buyer.
Where demand is elastic, the burden of tax will mainly be borne by the seller

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