Figure 15.22
Prior to tax the total wage paid was OWEN.
The workers
would have offered their labour at the minimum wage bill of OEN.
Thus OWE is a rent or supplier‘s surplus. When a tax on wage
income is introduced, the surplus falls to OW
1
E
1
. The fall in surplus
is equal to W
1
WEE. Out of this W
1
WAE
1
is the revenue received by
the government. Thus the net
loss of surplus is E
1
AE which is the
deadweight loss or excess burden of tax.
The excess burden of tax on wage income becomes less as
the supply curve of labour becomes less elastic.
15.4 SUMMARY
1. The concept of equity in taxation refers to the social justice
in the allocation of burden of tax. The tax burdens are of two
types‘ money burden and real burden.
2. Equity implies equality of real
sacrifice involved in tax
payments on the part of tax-payers.
3. Horizontal equity implies that all tax-payers having similar
economic conditions must be treated equally.
4. Vertical equity implies that different
people with different
economic situation and capacities are treated unequally.
5. For an equitable distribution of tax burden, the following
three principles have been laid down by economists: (i) Cost
of
Service Principle, (ii) Benefit Principle, and (iii)
Ability to
Pay Principle.
S
A
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