FACTORS THAT DETERMINE TAX SHIFTING

QUESTION

(a)         Giving appropriate examples, distinguish between forward and backward tax shifting.

(b)        Briefly explain five factors that determine tax shifting.                                           

Outline the main types of duties to be levied on goods according to the provisions

            of the Customs and Excise Act (Cap.472).         

ANSWER

                                   

                        (a)         Forward tax shifting – This refers to shifting the tax burden to the consumer through increase in selling prices.  For instance when the government increases the amount of tax levied on products such as beer or cigarettes companies increase prices of these goods.

Backward shifting – This occurs when a producer of a taxed commodity transfers the money burden of tax to the supplier of factors of production, who in turn is paid a lower price for the factors of production.  E.g. farmers are at times paid lower prices for their produce when a tax is imposed on the processor of the produce.

(b)        Factors determining tax shifting:

(i)         Elasticity of demand and supply – The more the elasticity, the lower the incidence on the sales.  The higher the incidence on supply.

            (ii)         Nature of markets

In an oligopolistic market (i.e sellers and many buyers) tax shifting to buyers is high since few sellers can team up to determine the market price.

In a situation where there are many buyers and sellers, a large portion of tax will be borne by sellers.

For a monopolistic market, the entire tax burden falls on the shoulders of the buyer.

(iii)        Government policy on pricing

In the case of government price control, the supplier cannot increase prices hence cannot shift tax burden to buyers and vice versa.

            (iv)        Geographical location

If taxes are imposed on certain regions, it is hard to shift them to consumers because consumers wil move to regions with low taxes.

            (v)        Nature of tax (direct or indirect tax)

Direct tax e.g PAYE cannot be shifted whatsoever while indirect taxes can be shiften through increase in prices.

            vi)         Rate of tax

If too high, shifting can occur backwards or forwards, if too low, it may be absorbed by the manufacturer.

            (vii)       Time available for adjustment

The person who can adjust faster (buyer or seller) will be able to shift tax e.g if the buyer cash shift to substitute goods, the seller will bear the tax burden.

            (viii)      The tax point

(c)         Duties according to Cap. 472

-   Import duties on goods imported at rates specified in first schedule

-   Suspended duties on imported goods at specific rates given in second schedule

-   Export duties on goods exported at rates given in fourth schedule

-   Excise duty on goods produced at rates specified in the fourth schedule

-   Dumping duty; duty charged in addition to any other duty charged under Cap 472.