January 29, 2022

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Meaning of Tax incidence and Key Explanations

Meaning of Tax incidence and Key Explanations
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From time to time, the government of a country may review it’s tax rates and decide to either increase or reduce the percentage. Tax incidence ensues when this changes occurs. In this article, it explains what this is all about.

Definition — What is Tax Incidence?

It is about the taxpayer who bears the burden of tax when there is an increase in a particular tax type. It can also be referred to as the who suffers the burden of an increment in tax.

Key Explanations

The taxpayer. This is the individual and corporate citizens that pay taxes to the government. Corporate citizens includes all types of businesses whether or not it is registered with the corporate affairs commission (CAC). All businesses, both a trader in a store, along the street or hawking pay taxes.

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Taxes that are paid. There are various types. Local governments usually charge tenement rates. The state government charges income on individuals and businesses other than companies while the federal government requests you pay the company’s income. These are only a tip to the taxes paid by citizens.

Burden of tax. Incidence is about who suffers when the rates are increased. Will the business or supplier bear the cost or can he pass it to the buyer. To understand this better, you need to know the product’s price elasticity of demand.

Increment in taxes. It is possible for the government of a country to decide on increasing or decreasing tax rates. In 2020, the Nigerian Federal government through the ministry of finance increased Value Added Tax from 5% to 7.5 percent. However, in 2021, it’s decided that employees receiving less or the minimum wage amount should not pay taxes.

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Conclusion

It is about the citizen that bears the burden of a tax. The citizen of a tax incidence can be individual or corporate. Who bears it depends on the product’s price elasticity of demand. Moreover, the government does adjust percentages in order to fulfill its responsibility to regulate the economy using fiscal policy.

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