It has often been suggested in the public debate that the consumption tax should be passed directly selling price. These statements occur in particular in the case of VAT rebates in connection with. However, the pass-through of consumption taxation to the price depends on many factors and it is not clear in advance what the magnitude of the shift will be. For example when consumption is sensitive to a fall in price, the seller does not have much need to lower the price because sales increase even without it. In this case, the tax reduction is based largely to the producer.
The goal is to minimize the loss of well-being
The aim of the consumption tax is to collect the desired tax revenue with the smallest possible ones welfare losses. This means that the tax should not distort. What can we say about such consumption taxation? It cannot be inferred from the mere allocation of the tax whether a particular consumption tax gives rise welfare losses. Instead, the distortion of consumption tax depends crucially how much taxes change the amount of goods consumed.
- So, moon-coffee cups are sold less due to the increase in excise duty, it is important to more than how much the price of a cup of coffee went up. Change in quantity describes how much the tax increase changed the demand and supply of a cup of coffee. The basic rule is that all the behavioral effects of taxation lead tools of vitality.
Choose Your Options for the Taxes
The greater is the demand and supply, the greater the loss decrease due to the tax is. If the coffee cup tax cut significantly increases it demand, it is clear that the previous tax was too high and distorted the consumer’s bird decision. The tax caused a loss of welfare to society by reducing welfare losses the amount traded on the market. If, on the other hand, the demand for a cup of coffee doesn’t just happen anything, the tax could have remained at its former higher level. Using the c corp tax calculator is proper here for understanding the whole process.
In addition to the above, welfare losses in consumption taxation are determined by much of the demand for certain commodities is related to the supply of work and leisure. This is because leisure time can also be seen as consumption in economic theory. In his spare time, he could do more, even work. However, there is no free time easy to tax and therefore its attractiveness increases as consumption taxes tighten. Taxation of labor reduces the supply of labor.
- If all consumption and labor are taxed in the same way, no such relative distortion would arise. Ideally, however, there would be a solution to this problem. Taxed more of the commodities typically consumed in the context of leisure and less of the goods that are consumed mainly in the course of work. Leisure still cannot be taxed, but yes consumption, which associated with leisure. For example, amusement parks, movies and leisure literature should therefore be taxed proportionately more than work clothes, business trips or lunches. In this way, the balance between work and leisure the prevailing tax distortion is reduced. Unfortunately, this is often not possible.