There is a difference between who is legally required to send a tax payment to the government and who bears the burden of the tax. Which of the following would have the most impact on who bears the burden of an excise tax?
A) whether the tax is imposed by the federal government or a state government
B) whether the tax is based on the ability-to-pay principle or the benefits-received principle
C) the motive for the tax: If the tax is designed to raise revenue, more of the burden will fall on firms. If the tax is designed to achieve a social objective (for example, to discourage smoking) more of the burden will fall on consumers.
D) the elasticity of demand for the item that is taxed

Question

Quizplus · Accepted Answer

The elasticity of demand for the item that is taxed has the most impact on who bears the burden of an excise tax. If demand is inelastic, consumers will bear most of the burden as they will continue to purchase the item even with a higher price due to the tax. If demand is elastic, producers will bear more of the burden as consumers will switch to other substitutes due to the higher price after the tax is imposed.

There Is a Difference Between Who Is Legally Required to Send