Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Check Your Progress: 
1. What is the difference between Horizontal and vertical 
equity? 
2. State the principles laid down for an equitable distribution of 
tax burden. 
3. Bring out the limitations of the Cost of service principle. 
4. Discuss the advantages and disadvantages of benefit 
principle. 
5. Differentiate between the Subjective and Objective approach 
to measure ability to pay principle. 
15.2 INCIDENCE OF TAXATION 
 
15.2.1 Meaning of Incidence 
When a tax is imposed on any individual, it is obvious that 
he may transfer to another individual, and this tax may be ultimately 
borne by another individual. Thus, the individual who originally pays 
the tax may not actually bear its money burden as such. This is 
known as the incidence of taxation. 
Therefore, incidence refers to the ultimate money burden of the tax. 
 
Impact, Shifting and Incidence 
The problem of incidence of taxation is analyse through 
three distinct but interrelated terms, namely impact, shifting and 
incidence. 

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Impact refers to the immediate result of or original imposition of the 
tax. The impact of a tax is on the person on whom it is imposed 
first. Thus, the person who is liable to pay the tax to the 
government bears its impact. 
Shifting is the process of passing on, or transferring part, or the 
entire tax burden from the subject of the tax to another individual. 
The burden of the tax is the tax rate. However, if the manu-
facturer or importer need not carry the burden and he can pass on 
the tax to his customers in terms of a higher price, customers 
eventually shoulder part or the entire tax burden. This is an 
example of shifting. 
A given tax may be shifted forward or backward, or may be 
absorbed by the statutory taxpayer. 
a. 
Tax is absorbed by the statutory taxpayer: shifting has not 
occurred and the incidence is on the subject of the tax 
b. 
Forward shifting takes place when the price of the taxed 
commodity was increased. 
c. 
Backward shifting takes place when the price paid for the 
factors of production involved in the manufacture of the 
taxed commodity has decreased.