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 Later, the tax was repealed because of its adverse impact on sales and employment in the industry.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.