S.A. JAIN (P.G.) COLLEGE

AMBALA CITY

PRSENTATION

ON

TOPIC

“EXCESS BURDEN OF TAX”

SUBMITTED BY

Surbhi Bhardwaj

M.A. (Prev.) Economics

4104

SUBMITTED TO

Ms. Pooja Mam

Department of Economics

TAX

A tax is a financial charge or other levy

imposed taxpayer by a state or other

functional equivalent or a state such that

failure to pay or evasion of a resistance to

collection, is punishable by law. Taxes are

also imposed by many administrative

divisions. Taxes consists of direct or

indirect taxes and many be paid in money

or as its labour equivalent.

EXCESS BURDEN OF TAX

Tax imposed both money burden and the real burden

over and above there burdens there may be an

additional burden on secondary burden on the tax

pair when a tax changes a price ratio of commodities

he consumes. When a tax payer has to substitute the

non tax product for tax product such sub stituation is

covtrary to his to his preference pattern between the

two products and is imposed on him against his

yield, this reallocation of consumer and budges lows

down welfare level and his secondary burden is

called the Excess Burden of Tax.

EXCESS BURDEN AND THE NATURE

OF COMMODITY

Suppose there is two goods X and Y.

DWL --- Dead Weigh Loss

Y

D

Y Good E1

S1 S1

S Revenue DWL E S

D

O Q1 Q X

X Good

For OQ* Quantity of X Good Consumer has to pay

amount equals to – OS Payment

Total Payment = OSEQ* there is Actual Payment

Willingness to pay total = OAEQ* Consumer

Surplus – SAE (OAEQ* - OSEQ*)

Before imposition of tax when tax is imposed total

quantity of X Produced Equals = OQ1

Y

Y Good C.S. E1

S’ S’

R E

S S

O Q1 Q X

X Good

For this he has to pay per unit = OS’

Total Payment = OS’E1Q1

Willingness to pay = OAE1Q1

Consumer Surplus = OAE1Q- OS’E1Q1

Loss of Consumer Surplus due to Tax Imposition

SAE= AS’E1=S’SE1E

Government due to Tax Imposition - S’E1SE ,

Dead Weigh Loss= E1E2E this is the loss

Which income to the society due to tax and it is

called Excess Burden of Tax.

Excess burden conditions for economic efficiency.

An arrangement is considered efficient if resources

are used in a way which does not leave possibility of

alternative anagement under which somebody would

be better of without anyone being verse off

economic efficiency envolve various requirement

and for this reality conditions are:-

1.) Alternative Products

2.) Income and Leisure

3.) Prices and Future Consumption

EXCESS BURDEN OF TAX AND

MEASUREMENTExcess burden of tax can be measure both under old

welfare economics (Marshall) and new welfare economic

this can be measured into two heading:-

1.) Partial Equilibrium Tax

2.) Excess Burden Under General Equilibrium Tax

The old welfare economics involve the concept of

involve the interpersonal utility comparision developed

by Alford Marshal and Pigou while treatement under

now welfare economics exclude utility comparison and

pause formulated firstly in a partial equilibrium term by

Josph and later in a general equilibrium by Rolph break.

MEASUREMENT OF EXCESS BURDEN OF TAX

Old Welfare Economics

Marshall, Pigou

Interpersonal Comparison Of Utility

With the help of loss of Utility Excess Burden Of

Tax can be measure

New Welfare Economics

Partial Equilibrium Condition

General Equilibriu

m Condition

With the help of Direct and Indirect

EXCESS BURDEN OF TAX ON THE BASIS

OF OLD WELFARE ECONOMICS

Y

S1

E1 S

Cost P

and P* E

Price N’

N

O Q1 Q X

Commodity X

Before Tax (Consumer Surplus(CS) = P*DE)

(P.S. = P*EN)

After Tax Imposition (Tax Imposed = NN’)

(C.S. = P’DE1)

(P.S. = N’K’N)

Loss of C.S. = P*DE- P’DE1

= P’P*EE1

Loss of P.S. = P*NE- N’K’N

= P*N’EK

Total Loss of Surplus (C.S. to P.S.)

= P’N’KE’E --- Government Revenue ---DWL

P’N’KG’E – P’N’KE’ = E1EK

EXCESS BURDEN OF TAX UNDER

PARTIAL EQUILIBRIUMY

B

B1

y* IC

y1E1

E2E

O X1 B2 X* B1 B X

X Good

Y Good

IC2

IC1

Zero Income Tax on a Society

Due to imposition of indirect tax. Budget Line

shift from BB to BB2 because indirect tax

imposed only on ‘X’ Good and due to this loss of

utility is higher than the loss of utility in case of

Income Tax because consumer is at lowest level

of IC i.e. IC2 while there is no change in

government Revenue which is equal both on case

of direct tax or indirect tax equal to be

equilibrium.

EXCESS BURDEN OF TAX UNDER

GENERAL EQUILIBRIUM

O X0 P

X Good

IC

IC1

E

P1

P1

Y

P

Y Good

Y0

MRSXY = MRSLK = PX

PY

In Income Tax is imposed by the government than

there is no change in a PPC and equilibrium in the

type of E if indirect tax between the payment of tax

and the recipient of tax revenue this difference

shows the amount of excess burden of Income Tax

that bears a society.

Due to imposition of tax producer earn low a prices

this difference in a payment and receipts' shows the

excess burden of tax that bear by a society due to

imposition of tax.

P1 P1 = Face by Producer

P2 P2 = Face by Consumer

P2 P2> P1 P1 = Difference shows the

excess burden of tax that prevails in the

economy.

ZERO EXCESS BURDEN OF TAX

Y

B

B1

P*

P1 IC

IC1

O Q1 Q B1 B

This can be possible on a

poll tax and head tax and

this is rarely in a income

tax. Which is not in the

prevail in the economy.

CORPORATION

TAX

AND

INCOME

TAX

CORPORATION TAX

Individual as well as Corporation Tax are subject

to Income Tax. When lived on individual’s

Income Tax on Corporation is known as

Corporation tax or Corporation Income Tax.

Income of companies are subject to taxation in

India. Formly these were to pay an Income Tax

on a super profit tax. Which were merge into a

single tax by companies tax act (1964)

companies.

EFEECT OF CORPORATION TAX

ON BUSINESS DECISSIONS

1.) Effect on Consumption

2.) Effect on efficiency incorporate management

3.) Effect on industrial location

4.) Disaggregate effect of preferential

treatment of certain business

5.) Loss carry overyes and merges

6.) Effect on choice between internal and external

financing

1.) By influencing the level of profits

2.) By influencing the decision to retain or

distribute these profits

3.) By effecting the terms of acquiring external

capital

7.) Stabilization effect of corporation income tax

8.) Effect on investment incentives

INCOME TAXAn Income Tax is a government levy(tax) imposed

on individuals or entities(taxpayers) that varies with

the income or profits of the taxpayers. Many

jurisdictions refer to income tax on business entities

as companies tax or corporation tax. Partnerships

generally are not taxed, rather the partners are taxed

on their share of partnership items.

Income tax generally is computed as the product

of a tax rate items taxable income. The tax rate may

increase as taxable income increases.

TAX EVASION AND BLACK

MONEYIt always assumes that the main reason for black

money generation was the world war II. The money

that is generated in the black money and which has

partly or fully escaped assessment is termed as black

money. In simpler terms, it means money that is not

taxed the circulation of black money is what is

referred to as “Parallel Economy” or “Unaccounted

Economy” or “Unsanctioned Economy” Or

“Underground Economy”.

SOURCES OF BLACK MONEY

1.) Drug / Arms Trafficking

2.) Smuggling

3.) Prostitution

4.) Terrorism

5.) Bribery and Kickbaeks

6.) Hawala Trade Arrangements

7.) Counterfeiting Currency

8.) Organized Crime

THE TWIN EVIL : TAX EVASION

AND BLACK MONEY

Generally, black money is generated in two ways:-

a.) One money which is generated through

illegitimate such as drug trafficking smuggling

etc.

b.) Money which is generated through legitimated

activities but is not reported and paid to the public

exchequer.

Second type of generation of black money is more

rampant and hazardous.

BLACK MONEY USING

ACCOUNTING MANIPULATIONS

Over the years there has been a substantias increase

in accounting and advditing standards very strict

disclosure requirements sincere efforts were put and

are still being put to refine.

Here are some of the methods employed by entities

which could be used as deceiving instruments to

smudge figures:-

1.) Omission of transaction from books of accounts

which are subject to taxation.

2.) Maintaing parallel books of accounts by taxpayer

using one of them for his personal purpose and

the other for business purpose.

3.) Manipulating sales other receipts by diverting

there to dummy entities.

4.) Manipulating expense by exaggerating true

business expenditure like depreciation to revenue

tax.

5.) Other manipulations like falsely inflating other

expense like extertainment pravelling etc to

receive tax.

6.) Through I’nal transactions diverting goods to

associated enterprises situated in lower tax

jurisdictions.

7.) Manipulating stock by under valuing them.

BIBLOGRAPHY

1.) Public Finance = R.K. Lekhi

2.) Public Finance = B.P. Tyagi

3.) Public Finance = R. K. Radhakrishan

4.) Internet