Difference between incidence and effects of taxation
Incidence of taxation
(i) Incidence of tax on rent.
When a tax is imposed on economic rent, it will fall on the landlord or on the person who enjoys it. This cannot be passed on to the tenant, because whatever surplus over costs he had is supposed to have been passed on to the landlord already in the form of rent. If, however, the landlord had been charging less than the full economic rent, he will now take in the slack and the tax, therefore, will be partly shifted up to the tenant. Tax on rent cannot be shifted to the consumers. We know that economic rent does not enter into price. If, therefore, rent is taxed, it will not affect the price. Hence, tax on economic rent will neither be borne by the consumer nor by the tenant; it will be borne by the landlord himself.
(ii) House Tax
Demand for housing accommodation is inelastic. People cannot do without a house. Therefore, the position of the tenant is not so strong as that of the landlord. If, therefore, the government imposes a tax on buildings, the landlord can pass it on to the tenants by raising the rent. This will happen if there is no rent control.
Effects of taxation
(a) The estate duty falls on the person who pays it. It is cynically said that the death duty (estate duty) falls on none, because the dead man cannot be made to bear any tax, whereas the inheritor has not yet inherited the property. But the tax really fails on one who inherits the estate.
(b) A turnover tax at each stage of production adds to the .price of the commodity at the final stage, and is, therefore, borne by the ultimate consumer. In the case of raw materials, it adds to the cost of production and raises the prices of manufactured goods. Such a tax is said to discourage trade and industry, and hence its incidence may be much widespread due to its adverse effects on trade and industry. It may create unemployment and thus make the workers suffer.
(c) The incidence of capital gains tax on the businessman concerned. It is a direct tax like the income-tax and cannot be shifted. In a competitive market, no businessman can raise price in order to reimburse himself for the income-tax he pays. He must bear the tax himself.