Business Economics

1.0 Reasons Behind Imposing A Tax & Taxes Are A Necessary Evil Or Not For An Economy.

Tax is referred to an involuntary fee which is charged on businesses and individuals imposed by government in order to finance the government activities of the country. Taxes are usually collected by the government to meet the expenses needed to run various services provided to the country’s citizens. Oil rich countries such as Saudi Arabia, Oman, etc does not impose taxes on their citizens, the reason is that they have enough money to meet its expenses and to run the country smoothly.

These taxes are imposed in order to maintain and build large infrastructure projects which include roads, railways, highways, bridges, underpass and lot more. The government also imposes taxes to spend the generated revenue on public goods and services in order to benefit the citizens. Goods includes reducing the prices of daily consumable items whereas services include the building and maintaining public security departments such as police, fire men, army, etc.

Paying taxes are considered as necessary evil for the citizen as it is must to pay and none of them enjoys it. For example, if the tax of plastic increases, than the end consumers will be effected as they have to pay more for the finished product due to taxes. Apart from this, the taxes paid by the investors on the investments will reduce the total amount of money invested, for example, if investor invests the money in stock and made 10% on the money invested, then those gains from the investment will be taxed which will reduce the total amount of gains.

Paying taxes is not only painful, but necessary. It becomes necessary evil when a customer finds out that the cost of the product or any service would be more than the stated cost and that he/she has to pay higher prices. This may lead to change in demand which will force the suppliers to drop the prices in order to increase the revenue and profits. This change in behaviour of the suppliers and consumers due to taxes is called market distortion.

However, in my opinion, if the government is extremely efficient and effective in terms of providing good services and responsible for all the tax money, then the citizens will not take these taxes as a burden, as they will be getting benefit from the government activities of providing maintained services, good transport, high quality infrastructures including bridges, roads, etc.

2.0 Analyse The Impact Of Gasoline Tax On Gasoline Prices And Output

Gasoline taxes have always been hotly debated topic in both of the environmental and economic policy settings. The fluctuations or changing in the prices of gasoline taxes have sudden impact on the prices as well as the output. According to Valery J. (2013), the average price of gasoline in the United States in 2013 was $3.78, and the politician parties (including government) understandably fear that the increase in gasoline tax will enrage the voters.

Furthermore, when the gasoline tax is increased, it is not just the gasoline prices that rise but also increases the cost of materials that are made from it such as chemical products. The cost of food rises as well because gasoline is not only used in cars but is also used in many ways while growing and transporting the food items. It affects by increasing the shipping prices of all types of items as the gasoline is used in almost all methods of transports.

On the other hand, according to IMF Research Department (2000), the financial impact of the increase in oil prices with tax is quite muted. The exchange rates of the currency remain relatively stable. There will be a temporary impact on the supply as the changes in prices of intermediate and important goods temporarily disturbs or interrupts the existing production and output arrangements. It is also said that among all the industrial countries, United States has the largest supply side impact. The higher the fuel tax in United States wedge, the smaller is the proportional impact on retail prices.

3.0 Tax Incidence & Factors Determining Tax Incidence:

Tax incidence is an economic term for the distribution or sharing of a tax burden between buyers and sellers. It is said that tax incidence is imposed on the group that ultimately bears and pay the amount of tax. This tax incidence also known as tax burden is not distributed depending on who is collecting the revenue, but depends on the price elasticity of demand and price elasticity of supply. Usually when there is inelastic demand then the tax is put on the consumers, whereas, when there is inelastic supply then the tax is put or the producers or retailers. However, suppose if a product is of inelastic demand such as daily consumable products, and the government imposed an increase on tax then the burden of tax will be completely on the consumers. Therefore, the economists refer to a tax incidence as the total economic effect a tax has on ones income.

It is important to determine the tax incidence as it can be imposed to anyone. There are few factors which help in determining the tax burden or tax incidence, they are:

(a)   Elasticity: As discussed earlier, elasticity of demand and elasticity of supply are both considered as it is one of the most important factors. If the demand for the taxed product is elastic, the tax will most probably be transferred to the producer but in inelastic demand, it will be tolerated by the consumer. Conversely, in case of elastic supply tax will be burdened on consumer; and on producer if it is inelastic.

(b)  Price: The distribution of tax burden completely depends on the change (increase or decrease) in price. It is an important factor; because the tax doesn’t affect the price of the product then it will remain unchanged.

(c)   Time: If the increased in tax occurred for a short run than not much can be done immediately to shift the tax burden by the producers, whereas in the long term full adjustments can be made to shift the burden to the consumers.

(d)  Market form: This is also the important factor of determining the incidence of taxation as it is important to know whether there is competition of product in the market or monopoly. While competition, shifting of tax burden will be questionable as producers can not affect the price due to competition. Whereas under monopoly, a producer is in a position to shift the burden completely to consumers.

4.0 The Incidence Of Tax Depends On The Relative Price Elasticity Of Demand And Supply. Do You Agree

As it was discussed earlier about the elasticity, this statement seems absolutely acceptable. Elasticity is one of the factors determining the incidence of taxation. The burden of the increase in tax is majorly dependent on the elasticity of the good taxed. The reason is because when the good is taxed and the demand of that good is inelastic than usually the tax burden is totally on consumers, because the increase in price will not affect the consumption of the good. For instance, if the price of fuel increases due to tax then the incidence of tax will be on consumers because fuel has an inelastic demand. As mentioned earlier, tax incidence changes continuously from elastic demand or inelastic supply in which the producer takes the burden of the tax, to the elastic supply or inelastic demand in which the consumer takes burden of the tax.

5.0 Share Of Tax When Supply Is Inelastic And Demand Is Elastic:

Following is the diagram, which shows that who share the major share of the tax when the demand is elastic and supply is inelastic:

Diagram 1: Inelastic supply (share of tax)

The diagram above shows that the burden of tax causes the market price of the product to increase from P to Pt (Price including tax) and causes the demanded quantity to get lower from Q to Qt (Quantity with tax). This change in quantity is significant because the demand is elastic. On the other hand as the supply is inelastic thus the price does not change much. In this scenario, the producer was unable to share the tax burden on to the consumers due to inelastic supply; therefore the incidence of taxation will be tolerated by the producer. It can be said that the tax is collected by the producers and is also borne by them.

6.0 Who Will Bear The Major Share Of The Gas Tax In The US – The Producers Or The Consumers?

Globally, Gasoline is a main item required by everybody in every purpose mainly in transportation and manufacturing, therefore the demand of gasoline is always high that is why it have an inelastic demand. However, supply of gasoline in all around the world is relatively lower; especially in US the supply of gasoline is elastic as only 55% - 60% of the total consumption is being used in 2004.

Furthermore, adding more tax in the price of gasoline can be risky for the government as the citizens including consumers and producers will have to pay more amount of tax.  If the tax will be increased, the price of the products produced will be relatively higher too. The higher gas prices means that every individual will have to pay more at the gas stations which will result in less spending on other goods and services. This high price not only affects the consumers during the filling of gas on gas stations but also have an effect on the broader economy. Discretionary spending will be reduced as more people will be using online shopping in order to save fuel cost. In addition, the higher prices will affect auto industry, public transportation, work schedule, and will reduce the opportunity of new jobs due to increase in costs in different industries.

Thus, in my opinion, increase in gasoline tax will mainly affect the end consumers/buyers as compared to producers, as it is known that the demand of the gasoline is higher than the total consumption. Therefore, consumers will be forced to buy and tolerate the increased amount of tax.

7.0 How A Gas Tax Affects The Economic Goals Of A Country.

In this world, every country has its own economic goal in order to develop the country and to make the country rich. The economic goals usually depend on the country in order to improve the economic conditions. Some of the major economy goals that most of the countries consider are price stability, economic growth of the country, lower unemployment rate, controlled inflation rate and reasonable distribution of income and wealth. These goals or objectives are set to achieve in order to maintain the stability and development of the country.

Price stability is considered as one of the important economic goals of the country which is in economic term referred to condition where the price of the goods and services remain unchanged or if it changes then it will not influence much impact on the economy. In other words, price stability can be referred as the least fluctuation of the price which doesn’t affect the economy. As mentioned earlier, changes in gasoline taxes will increase the prices of the products or services; this is because the demand is inelastic and the burden of tax is included in the finished product which is shared by the buyers, affecting the price stability in the economy of the country. Usually, it is not common for an economy to have price stability especially when the gasoline or fuel prices increases, however every country should maintain it in order to minimise or prevent the risk of inflation. This maintaining and achieving the lower level or stable inflation is a foundation for economic and social objectives.

According to Chad Langager (2013), “the price of oil and inflation are often seen as being connected into a cause and effect relationship, as oil prices move up or down inflation follows in the same direction”. The main reason for this to happen is because the gasoline is the major component and input for any economy which is used in almost all the public and governmental activities such as transportation, heating, manufacturing, etc. For instance, if the price increases, it will cost more to make materials and the company will pass the cost to consumers, which increases price and the inflation. According to Chad Langager, the relationship between oil prices and inflation becomes clearer from 1999 to 2005 when the oil prices run up. During this time, the annual average nominal price of oil rose from $16.50 to $50.40, whereas the Consumer Price Index (CPI) rose from 164.30 in January 1999 to 196.80 in December 2005. By analysing and viewing at this data, it can be ensured that there is a strong correlation between oil prices and inflation rate.

It is important to ensure that the resources of the country are fully employed in order to produce more goods and services. High unemployment rate in a country will definitely lead to economic downfall and social problems, which increase the crime rates and corruptions. Increase in gasoline prices affects the unemployment rate of the country and the main reason for this is very simple. Increased oil prices damage the companies by rising the firm’s energy and transport bills and minimises the level of production or reduce the employees in order to survive in the market.

In the chart below, it can be seen that rising of oil prices during 1973 to 1974, 1979 to 1980, 2009 – 2010 and others causes increase in unemployment rate. On the other hand, due to fall in 1986, 1997-1998 and 2003-2005, the unemployment rate falls. This shows that increase in gasoline prices due to taxes might have an impact on the unemployment rate.

Diagram 2: Relationship of Oil price and Unemployment rate

8.0 REFERENCES:

A. Curruth, A., A. Hooker, M. and J. Oswald, A. (2014). Unemployment Equilibria and Input Prices: Theory and Evidence from the United States. [online] Available at: http://www2.warwick.ac.uk/fac/soc/economics/staff/ajoswald/cho.pdf [Accessed 22 Nov. 2014].

Investopedia, (2009). Taxes Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/t/taxes.asp [Accessed 22 Nov. 2014].

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Plus, G. and →, V. (2011). Why Do Governments Impose Taxes | Why Do Government Collect Tariffs. [online] Finance n Investments.com. Available at: http://www.financeninvestments.com/economics/508.html [Accessed 22 Nov. 2014].

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The Other Librarian, (2011). Make No Mistake: Taxes Are An Evil, However Necessary. [online] Available at: http://otherlibrarian.wordpress.com/2011/04/20/make-no-mistake-taxes-are-an-evil-however-necessary/ [Accessed 22 Nov. 2014].

Theoildrum.com, (2014). The Oil Drum | Ten Reasons Why High Oil Prices Are a Problem. [online] Available at: http://www.theoildrum.com/node/9789 [Accessed 22 Nov. 2014].

Ukessays, (2014). What are the four major economics goals achieved by every country. [online] Available at: http://www.ukessays.com/essays/economics/what-are-the-four-economics-goals-achieved-by-every-cou