Why doesn't tax affect demand?
The imposition of a tax does not affect the demand or supply function as long as we consider the demand function as a function of the consumer price and the supply function as a function of the producer price. These functions/curves can be used to find/represent consumer and producer surplus with or without the tax.
Increasing tax
If the government increases the tax on a good, that shifts the supply curve to the left, the consumer price increases, and sellers' price decreases. A tax increase does not affect the demand curve, nor does it make supply or demand more or less elastic.
What is the effects of tax and subsidy on supply and demand? Tax decreases supply and decreases the quantity demanded. Subsidy increases supply and increases the quantity demanded.
Answer and Explanation:
As the tax is imposed on the buyer then the demand curve shifts leftward or decreases with the same supply curve in such a manner that both price and output decreases.
The burden of a tax falls most heavily on someone who can't adjust to a price change. That means buyers bear a bigger burden when demand is more inelastic, and sellers bear a bigger burden when supply is more inelastic.
The imposition of a tax does not affect the demand or supply function as long as we consider the demand function as a function of the consumer price and the supply function as a function of the producer price. These functions/curves can be used to find/represent consumer and producer surplus with or without the tax.
An increase in income taxes reduces disposable personal income and thus reduces consumption (but by less than the change in disposable personal income). That shifts the aggregate demand curve leftward by an amount equal to the initial change in consumption that the change in income taxes produces times the multiplier.
How do taxes affect the economy in the long run? Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits.
When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services. This increases the overall supply of that good or service, which increases the quantity demanded of that good or service and lowers the overall price of the good or service.
If the government reduces tax, more disposable income available, k increases and money demand is increased. If taxes increase, k falls, money demand falls. Tax cuts are a very effective way to eliminate recession, for instance tax cuts of 30% in 1980 caused the UK to move away from recession.
Do tax cuts increase demand?
Supply-side tax cuts are aimed to stimulate capital formation. If successful, the cuts will shift both aggregate demand and aggregate supply because the price level for a supply of goods will be reduced, which often leads to an increase in demand for those goods.
A tax on the buyers would induce the consumers to demand less, causing a left shift in the demand curve.
For example, if the number of buyers in a market decreases, there will be less quantity demanded at every price, which means demand has decreased.
Taxes are an important source of revenue for the government. However, taxes decrease both supply and demand in the market, because buyers have to pay a higher price and sellers receive a lower price for their product.
Tax incidence can also be related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.
A consumer will have to pay the producer and the tax. The perceived supply curve is both of those costs instead of just the producer cost. In the case of a perfectly elastic demand, the tax does not affect the final price that the consumer pays.
Taxes provide revenue for federal, local, and state governments to fund essential services--defense, highways, police, a justice system--that benefit all citizens, who could not provide such services very effectively for themselves.
In the model of aggregate demand and aggregate supply, a tax rate increase will shift the aggregate demand curve to the left by an amount equal to the initial change in aggregate expenditures induced by the tax rate boost times the new value of the multiplier.
Since consumption is a component of aggregate demand, the aggregate demand will decrease as well (shifts to the left). If taxes decrease, the disposable income increases, consumption increases and the aggregate demand increases (shifts rightwards).
In its most general form, the Laffer curve depicts the relationship between tax rates and the revenue the government receives–that is, a single tax rate exists that maximizes the amount of revenue the government obtains from taxation.
Why does tax shift the supply curve and not demand curve?
The new market price is , but sellers receive only per unit sold since they pay to the government. Since a tax can be viewed as raising the costs of production, this could also be represented by a leftward shift of the supply curve. The new supply curve would intercept the demand at the new quantity .
If the government raises the income tax rate, people pay a higher portion of their income in taxes—which means they have less income to buy goods and services. If the government cuts the income tax, or takes a smaller portion of peoples' income, people have more money to spend on goods and services.
There are a few countries with no taxes that are still able to generate significant government revenue. Countries can generate revenue from state-owned businesses such as oil and mineral exports, tourism, real estate, and other industries.
Raising taxes on the wealthiest Americans pushes inflation in the right direction, but it has a relatively small effect. This is because the wealthiest Americans have a lower marginal propensity to consume their income: when taxes go up on billionaires, they reduce their consumption, but not by that much.
Tax affecting is a valuation approach that establishes the fair market value of pass-through entities by assuming a corporate tax rate (even though individual owners actually pay tax on pass-through income). Courts have applied tax affecting based upon the facts and circ*mstances presented in each case.
