Question

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Taxation :

a) State the three rules of tax incidence.

b) Explain the intuition behind the shape of the Laffer curve.Derive and show in a figure

Answer 1

3 rules of tax incidence:

1. Statutory burden of tax doesn't define who shall bear burden of taxes
2. Side of market on which tax is imposed is irrelevant to distribution of tax burdens
3. Parties with inelastic supply or demand shall bear tax burden.

Laffer curve is usually parabolic in nature largely as government revenue is plotted on vertical axis and tax rate on horizontal axis which means when taxes are higher the revenues rises and reaches point where it is maximum. After which the rise inntaxes causes tax evasion and thus government revenues decline to almost zero.