Elasticity and the incidence of tax
tax burden 
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If the actual incidence of a tax is independent of its statutory assignment, what does determine the incidence? The answer: The incidence of a tax depends on the responsiveness of buyers and of sellers to a change in price. When buyers respond to even a small in- crease in price by leaving the market and buying other things, they will not be willing to accept a price that is much higher than it was prior to the tax. Similarly, if sellers respond to a small reduction in what they receive by shifting to the production of other goods or going out of business, they will not be willing to accept a much smaller payment. net of tax. The burden of a tax- its incidence- tends to fall more heavily on whichever side of the market has the least attractive options elsewhere- the side of the market that is less sensitive to price changes, in other words.
In the preceding series of posts, we saw that the steepness of the supply and demand curves reflects how responsive producers and consumers are to a price change. Relatively inelastic demand or supply curves are steeper (more vertical), indicating less responsiveness to a change in price. Relatively elastic demand or supply curves are flatter (more horizontal), indicating a higher degree of responsiveness to a change in price.
It will not be easy for gasoline consumers to shift- particularly in the short run- to other fuels in response to an increase in the price of gasoline. The inelastic demand curve shows this. When a 20-cent tax is imposed on gasoline, buyers end up paying 15 cents more per gallon ($2.05 instead of $1.90), while the net price of sellers is 5 cents less ($1.85 instead of $1.90). When demand is relatively inelastic, or supply is relatively elastic, buyers will bear the larger share of the tax burden.
Conversely, when demand is relatively elastic and supply is inelastic, more of the tax burden will fall on sellers and resource suppliers. The luxury-boat tax illustrates this point. As we mentioned earlier, Congress imposed a tax on the sale of luxury boats in 1990. Later, the tax was repealed because of its adverse impact on sales and employment in the industry. There are many things wealthy potential yacht owners can spend their money on other than luxury boats sold in the United States. For one thing, they can buy a yacht someplace else, perhaps in Mexico, England, or the Bahamas. Or they can spend more time on the golf course, travel to exotic places, or purchase a nicer car or more expensive home. Because there are attractive substitutes, the demand for domestically produced luxury boats is relatively elastic compared to supply. Therefore, when a $25,000 tax is imposed on luxury boats, prices rise by only $5,000 (from $100,000 to $105,000), but output falls substantially (from 10,000 to 5,000 boats). The net price received by sellers falls by $20,000 (from $100,000 to $80,000 per boat). When demand is relatively elastic, or supply is relatively inelastic, sellers (including resource suppliers) will bear the larger share of the tax burden.
Actual vs. statutory incidence
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Economic analysis indicates that the actual burden of a tax- or more precisely, the split of the burden between buyers and sellers-does not depend on whether the tax is statutorily placed on the buyer or the seller. To see this, we must first look at how the market responds to a tax statutorily placed on the buyer. Continuing with the auto tax example, let’s suppose that the government places the $1,000tax on the buyer of the car, rather than the seller. After making a used-car purchase, the buyer must send a check to the government for $1,000. Imposing a tax on buyers will shift the demand curve downward by the amount of the tax. This is because the height of the demand curve represents the maximum price a buyer is willing to pay for the car. If a particular buyer is willing and able to pay only $5,000 for a car, the $1,000 tax would mean that the most the buyer would be willing to pay to the seller would be $4,000. This is because the total cost to the buyer is now the purchase price plus the tax.
The price of used cars falls from $7,000 (point A) to $6,400 (point B ) when the tax is statutorily placed on the buyer. Even though the tax is placed on buyers, the reduction in demand that results causes the price received by sellers to fall by $600. Thus, $600 of the tax is again borne by sellers, just as it was when the tax was placed statutorily on them. From the buyer’s standpoint, a car now costs $7,400 ($6,400 paid to the seller plus $1,000 in tax to the government). Just as when the tax was imposed on the seller, the buyer now pays $400 more for a used car.
The actual burden of the $1,000 tax is independent of its statutory incidence. In both cases, buyers pay a total price of $7,400 for the car (a $400 increase from the pretax level), and sellers receive $6,400 from the sale (a $600 decrease from the pretax level). Correspondingly, the revenue derived by the government, the number of sales eliminated by the tax, and the size of the deadweight loss are identical whether the law requires payment of the tax by the sellers or by the buyers. A similar phenomenon occurs with any tax. The 15.3 percent Social Security payroll tax, for example, is statutorily levied as 7.65 percent on the employee and 7.65 percent on the employer. The impact is to drive down the net pay received by employees and raise the employers’ cost of hiring workers. Economic analysis tells us that the actual burden of this tax will probably differ from its legal assignment, and that it will be the same regardless of how the tax is statutorily assigned. Because market prices (here, workers’ gross wage) will adjust, the incidence of the tax will be identical regardless of whether the 15.3 percent is levied on employees or on employers or is divided between the two parties.