This blog post examines whether producers or consumers ultimately bear the tax burden imposed by the government. We will explore how tax burdens are determined through market principles.
The government imposes taxes to secure funds for fiscal projects. However, one principle of tax policy is fair taxation—the equitable distribution of the tax burden. Therefore, determining who pays how much tax is critically important. Tax policy must be fair because taxes are not merely a means for the government to raise funds; they have a tangible impact on citizens. The method of tax imposition and the distribution of that burden can significantly influence social justice and economic efficiency.
Once the government determines the payers for a specific tax, it imposes the payment obligation through tax laws. However, in practice, the tax burden often shifts to others, a phenomenon known as ‘tax shifting’. Tax shifting means that during economic transactions, the tax burden is transferred to economic entities other than the originally intended taxpayer. This operates in complex ways depending on the elasticity of supply and demand in the market, specifically sensitivity to price changes.
For example, suppose the government imposes a commodity tax of 100 won per pen on producers. If 1 million pens were being traded at 1,500 won each before the tax, the producer would owe a total tax of 100 million won. Suffering this loss, the producer becomes dissatisfied with the 1,500 won price and attempts to raise it by 100 won. When producers become dissatisfied, prices begin to rise. However, prices do not rise indefinitely. While higher prices alleviate producer dissatisfaction, they conversely increase consumer dissatisfaction. Ultimately, through the market’s price adjustment process, the opposing forces of both sides reach a point of equilibrium, forming a new price between 1,500 won and 1,600 won. That is, while producers, as legal taxpayers, pay all taxes, the price increase effectively reduces their actual tax burden per sack by that amount. Conversely, consumers pay a higher price, meaning they bear the tax burden commensurate with the price increase.
Meanwhile, tax shifting does not occur in only one direction. Suppose the same tax is imposed on consumers. Consumers must pay producers 1,500 won per bag, meaning they actually spend 1,600 won. This inevitably leads to consumer dissatisfaction. When this dissatisfaction is reflected in the market, the market’s price adjustment mechanism kicks in, causing prices to fall. Ultimately, consumers reduce their tax burden by the amount the price falls. Thus, even if the government imposes taxes on consumers, the tax burden is passed on to producers.
So how is the actual burden share between the two sides determined? This depends on how consumers or producers react to changes in the product price. For example, if consumers cannot significantly alter their purchase quantity despite price changes, consumers will bear a larger tax burden regardless of which side the tax is imposed on. When taxing producers, the demand for price increases is reflected more strongly, leading to a new price forming at a significantly higher level than before. That is, the producer tax is largely passed on to the consumer. However, when taxing consumers, the demand for price reductions is not well reflected, so prices do not fall significantly. Consequently, consumers bear most of the tax burden.
Additionally, when producers attempt to pass the tax burden onto consumers, how much consumers accept this is also a crucial factor. For example, with products like necessities, consumers are less sensitive to price increases, allowing producers to easily pass the tax burden onto them. Conversely, for luxury goods or products with many substitutes, consumers are highly sensitive to price increases, making them more likely to reduce demand or switch to alternative goods. In such situations, producers bear a significant portion of the tax burden.
This tax shifting phenomenon inevitably makes it difficult for governments to identify who truly bears the tax burden. If this shifting mechanism is not sufficiently considered when designing tax policy, unintended consequences may arise, such as specific groups bearing excessive tax burdens or economic imbalances worsening. This risks undermining the fairness and efficiency of taxation, making it critically important for policymakers to accurately understand and account for the mechanisms of tax shifting.
