Governments need money to run their daily activities and to offer various services to the public. Arguably, the main source of revenue for a government is a collection of taxes either directly by imposing them on salaries and wages or indirectly by imposing them on goods and services. It is important to note that taxes are compulsory and they are used by governments to provide services that are beneficial to the general public.
Moreover, taxes are not payments for any specific services rendered by the government (Kaplow, 2011). The benefits of various types of taxes to the economy have been a subject of debate for a long time now. Specifically, taxes levied on goods and services have been said to have mixed effects on the economy and some people are skeptical about their necessity.
Taxes are imposed to achieve desired consumption and price levels. Similarly, taxes are used by governments to achieve specific employment level as well as to enhance income distribution. However, the incidence of taxes sometimes distorts the aim of taxation. Incidence of tax determines who finally pays the monetary value of tax.
This usually occurs because people can shift the money burden of tax from one person to another especially for indirect taxes. However, the incident of tax is also influenced by various factors (Haufler, 2001). When a commodity’s elasticity of supply is more than the elasticity of demand, buyers will pay a higher amount of tax than sellers.
This means that the price of the commodity will increase above the normal market prices. On the other hand, if the elasticity of demand is higher than the elasticity of supply for a given commodity, suppliers will have to bear the burden of the tax alone or pay the higher percentage of it. This has the effects of increasing operational costs of producers ( Kaplow, 2011).
In this regard, producers will be discouraged from producing certain commodities if taxes are high. Taxes on commodities can also have different effects depending on whether production costs are increasing or decreasing. If taxes are imposed on a commodity whose production costs are increasing, the price will rise by less than the amount of tax.
In this case, the burden of the tax will be shared between the buyer and the seller depending on the elasticity of demand and supply. On the other hand, if tax is imposed on a commodity whose production costs are decreasing, the price of the commodity will increase by more than the amount of tax (Dwivedi, 2002).
As price increases disproportionately, quantity demanded of the commodity decreases by a higher percentage than the increase in prices. This, in turn, decreases supply. The tax also reduces the purchasing power of people which affects demand thus interfering with the market operations.
Taxation is a way through which the government influences the market and market forces of demand and supply are not left to operate freely. On the same note, if tax leads to an increase in prices, people will be compelled to reduce savings to maintain their living standards (Dwivedi, 2002).
It is important to note that commodity tax is not vital in the distribution of income. In essence, commodity tax only serves to interfere with the market forces and bring about inefficiency in free market operations. However, tax is crucial in supporting the government, and no government can do without a tax system. Therefore, it is important for policymakers to find ways of ensuring that there is a balance between tax effects and benefits.
References
Dwivedi, D. N. (2002). Microeconomics: Theory and Applications. New Delhi: Pearson Education India.
Haufler, A. (2001). Taxation in a Global Economy: Theory and Evidence. Cambridge: Cambridge University Press.
Kaplow, L. (2011). The Theory of Taxation and Public Economics. Princeton: Princeton University Press.