Introduction
To begin with, it should be stated that the issues of federal taxation system can not be regarded as the stabilizing factor for the economy, nevertheless, all the governments on all levels resort to taxation in order to increase the revenues for the high-importance public projects. In the light of this fact, there is a strong necessity to mention that the nature of taxes may be different, as well as the effect of the taxation and the consequences of taxing. Originally, these are the important policy instrument, and it is the most powerful factor of influencing the economy.
Is the tax levied on the producers or consumers?
First of all, it should be stated that taxes are generally levied basing on the type of the goods. Thus, producers as well as consumers may be taxed. Mankiw (2004) states the following notion on this matter: “Many United States citizens and resident aliens receive income from foreign sources. There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with accounts in other countries of the world. The interest of the IRS, however, extends beyond foreign accounts to accounts anywhere in the USA. Consequently, the IRS reminds you to report your worldwide income on your U.S. tax return.” From this point of view, it should be stated that the federal system of taxation presupposes levying taxes from producers if they are located abroad, and consumers are taxed when the origin of their property is subjected to taxation. The main difference here is the factor of capital gain or loss is the only dissimilarity between the issues of property value when a property is purchased and the value of the property when it is disposed (when the ownership is transferred).
How does the tax affect supply or demand?
This Graph represents the relation between taxation and supply-demand issues. In the light of this fact, it should be stated that the tax incidence falls mostly on the producer. Sobel (2007) in the research aimed at analyzing the issues of federal taxation states the notion that tax incidence never affects solely demand or supply. It is a factor for the distribution of economic welfare: “Tax incidence is generally regarded to “fall” upon the group that, finally, in the end of a period, bears the burden of the tax. The central notion is that the tax incidence or tax burden in no way depends on where the income is obtained, however, the key role is played by price elasticity of demand and price elasticity of supply. For instance, a tax on farmers might actually be paid by owners of agricultural land or those, who buy their production.” Taking this notion into consideration, there is a strong necessity to emphasize that the theory of tax incidence seriously impacts the practical results of demand and supply issues.
How does the tax affect the equilibrium price and quantity?
As for the issues of price and quality, it should be stated that these factors are generally represented through the concept of marginal tax on the sellers. Originally, this concept claims for the shifted supply curve, until the disparity between two supply curves is equal to the tax, which is imposed on the sales of every single unit. What happens then is described by Mcgilsky (2002): “when other things remain equal, this will increase the price paid by the consumers (which is equal to the new market price), and decrease the price received by the sellers. Alternatively, a marginal tax on consumption will shift the demand curve to the left; when other things remain equal, this will increase the price paid by consumers and decrease the price received by sellers by the same amount as if the tax had been imposed on the sellers, although in this case, the price received by the sellers would be the new market price.” Consequently, the equilibrium price and quality will change in accordance with the changes in supply and demand (as it is stated in Graph 1.)
Hypothetical situation where a price ceiling or floor could be imposed. What implications would this have for the market?
Any hypothetical situation when a price ceiling may be imposed is covered in the notion of supply-demand modification and elasticity. Originally, the price can not grow as well as fall endlessly. Thus, taxes, imposed on the goods may be used as the deterrence factor for the prices. The possible implications that the market will have will be related to the matters of price and quality changes. Thus, the price level is responsible for the levels of quality. Taxation, in its turn, regulates the changes of taxed supply and demand, restricting the growth of the prices and fall of the quality levels.
References
Mankiw, N. G. (2004). “Principles of economics” Chicago, IL: Thomson South-Western.
Mcgilsky, D. A. (2002). Federal Taxation: Practice and Procedure. Issues in Accounting Education, 17(4), 458
Sobel, R. S. (2007). Optimal Taxation in a Federal System of Governments. Southern Economic Journal, 64(2), 468