6.1.1 Tax collection

Taxes are involuntary public charges levied by the state on natural or legal persons without any guarantee of consideration.¹ They are levied to generate income for the state to provide public goods such as road construction. A tax can be levied on both the consumer and the producer of a good.² One question that arises in this context is who bears the economic burden of the tax (tax incidence). As will be shown, the distribution of the economic tax burden does not depend on who pays the tax.
In this graph, both the payment of taxes by consumers or buyers can be analyzed (net view) and the payment of taxes by producers or sellers (gross view).
In an unregulated market, the price reaches the level $\mathit{Pwotax}$ (price without taxes), while the quantity $\mathit{Qwithtax}$ is being sold. If a tax is imposed on the buyers of this good, this is illustrated by shifting (unit tax) or turning (%- tax, e.g. sales tax) the supply- or demand- curve downwards by the amount of the tax. The new demand curve is called effective demand because it reflects the net willingness to pay (=actual willingness to pay - tax to be paid) of consumers. The same applies to the supply curve.
In the above graph, the amount of the selected tax rate can be set with the slider on the bottom. Correspondingly, this results in a stronger or weaker rotation of the curves.
A new market equilibrium is established at the intersection of the effective demand curve and the supply curve. This equilibrium is characterized by three properties:
1.) The sold quantity $\mathit{MTax}$ is the lesser, the higher the tax is.
2.) Consumers have to pay the more expensive price $\mathit{Pgross}$ (price they pay to the producers plus the tax). The producers only get the lower price $\mathit{Pnet}$.
3.) The difference between these two prices is the amount of the tax and is paid to the state.
Not only consumers suffer from the increased price $\mathit{Pgross}$ caused by the tax, but also producers who receive the lower price $\mathit{Pnet}$. Thus, producer and consumer share the tax burden. Even though the consumers pay the full amount of the tax with the increased price, the producers in turn only obtain a lower price.
In this example, an ad valorem tax is shown. The most important ad valorem tax is the sales tax. The tax to be paid is based on the value of the sales, i.e. the more expensive the good, the higher the tax. For a constant tax rate, the difference between gross and net price increases as the price increases. The supply- or demand- curve is tilted by the tax. In contrast, in the case of a quantity tax – i.e., a fixed amount of tax must be paid for each unit of the good sold – the curve would shift parallelly. This is the case, for example, with taxes on mineral oil, cigarettes and alcopops. The effects on the market are essentially the same for both types of tax.