TAXATION CASE

Taxation Case



Taxation Case

The effects of taxation and price control on the economy range from the curtailment of the supply of goods to the increase of costs. When there is a tax impose on goods like tobacco or cigarette as described in the two articles, there is an increase in the price of the product, this shifts the supply curve of the product to the left, in other words less quantity is available at the same prices, there is a decline in the quantity demanded and a new equilibrium between demand and supply is reached. On the other hands when price controls are imposed there is an artificial decline in the prices.

At the lower prices, a higher quantity is demanded but the production is insufficient to fulfill that demand and so a shortage remain. There are stock outs. So in case of imposition of taxes as has been done in case of cigarettes, there is excess production capacity and the factors of production have to be diverted to other industries or sectors. Alternately, the production can be exported.

The intended effect is that the incidence of smoking gets reduced. The tax is levied on the consumers. This is the reason why the proposed tax of $1 will increase the price of a cigarette pack by $1. For administrative reasons the tax may be collected from the producers, however, this tax is clearly on the consumers. The tax will affect the demand for cigarettes. It has been shown through several empirical studies that imposition of taxes leads to a decrease in smoking. Those states that have imposed taxes have witnessed lower levels of smoking and those states that have not imposed steep taxes have witnessed lower levels of reduction in smoking. As smoking becomes more expensive, the number of cigarettes smoked falls. There is no direct effect on the supply, however, when the demand for cigarettes fall the supply will be reduced. Several factors of production that are employed in producing cigarettes will be unemployed. Employees will have to leave for other industries. Land and buildings that are involved in cigarette production and distribution will be reduced. For instance, the New York offices of Altria are being closed down and about 400 workers will be laid off.

The increase in taxes will affect the equilibrium price and quantity. The price of cigarettes will go up initially by $1 if a tax of ...