Tax imposition often needs to have a solid blueprint before getting into any trouble. Government levies taxes on the public and institutions to sustain the economy and also to manage the expenditures. The buyers and the sellers both have their assigned taxes in the respective domain. The tax on the buyers would de-escalate the chance of less selling. But a tax imposed on the sellers of a good will lower the effective price received by sellers and lower the equilibrium quantity.
Taxes imposed on the buyers of a good
Tax imposition on the buyers of a good result in the negative results. The demand curve eventually tends to a downward position with respect to the tax. Buyers would be reluctant to buy goods because of the high prices and taxes levied on the products.
Taxes imposition on the sellers of a good
A tax imposed on the sellers of a good will also result in negativity. When the tax is levied on sellers, the supply curve shifts upward by that amount. But in both cases, when the tax is activated, the price paid by both the sellers and buyers rises and profit received by the sellers eventually falls.
Effect on Buyers and Sellers
A tax increases the price a buyer pays by less than the tax. Similarly, the price the seller obtains falls, but by less than the tax. Both the buyers and sellers are involved in this process. The relative effect on buyers and sellers is known as the incidence of the tax.
Incidence of tax
The incidence of tax places a wedge between the price paid by buyers and the price received by sellers. When the market reaches new equilibrium the buyers pay more for the good and sellers receive less for the good. When taxed the equilibrium quantity of the good falls and reduces the size of the market for the good.
There are two main economic effects of a tax: a fall in the quantity traded and a diversion of revenue to the government.
Because tax is not levied on buyers, the quantity demanded at any given price is the same, thus, the demand curve does not change. By contrast, the tax on sellers makes the business less profitable at any given price, so it shifts the supply curve.
Wind Up Remarks
So the concluding remarks deduce that the tax imposition on both the buyers and sellers affects both. If the tax is levied upon the buyer, he will generally try to buy the good less often and the same goes to the seller who if the tax is imposed upon him, he will be reluctant enough to buy that from the wholesale market.