In this blog post, we will examine whether producers or consumers bear the final burden of government taxes. We will explore how the tax burden is determined through the principles of the market.
The government imposes taxes to secure funds for fiscal projects. However, since one of the principles of tax policy is fair taxation—that is, the equitable distribution of the tax burden—it is crucial to determine who should pay how much in taxes. 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 affect social justice and economic efficiency.
Once the government determines who is liable for a specific tax, it imposes the obligation to pay through tax laws. However, in practice, it is common for the taxpayer’s tax burden to be shifted onto others; this is known as “tax shifting.” Tax shifting refers to the transfer of the tax burden from the originally intended taxpayer to another economic agent during economic transactions. This operates in complex ways depending on the elasticity of supply and demand in the market—that is, sensitivity to price changes.
For example, suppose the government imposes a 100-won excise tax per pack on ballpoint pens. If 1 million packs were being traded at 1,500 won per pack before the tax was imposed, the producer would have to pay a total of 100 million won in taxes. The producer, who will incur a loss as a result, becomes dissatisfied with the 1,500-won price and attempts to raise it by 100 won. When the producer becomes dissatisfied, prices begin to rise. However, prices do not rise indefinitely. This is because while the price increase alleviates the producer’s dissatisfaction, it conversely increases consumer dissatisfaction. Ultimately, through the market’s price adjustment process, the opposing forces of both sides reach a point of equilibrium, and a new price is established between 1,500 won and 1,600 won. In other words, while the producer, as a legal taxpayer, will pay all taxes, the price increase effectively reduces the actual tax burden per sack. On the other hand, since consumers pay a higher price, they end up bearing the tax burden equivalent to the price increase.
Meanwhile, tax shifting does not occur in only one direction. Suppose the same tax is imposed on consumers. Since consumers must pay 1,500 won per bag to producers, they effectively have to spend 1,600 won. Consumers are bound to be dissatisfied with this. When consumer dissatisfaction is reflected in the market, the market’s price adjustment mechanism kicks in, causing prices to fall; ultimately, consumers are able to reduce their tax burden by the amount of the price drop. In other words, even if the government imposes a tax on consumers, the tax is passed on to producers.
So, how is the actual burden shared between the two parties determined? This depends on how consumers and producers react to changes in product prices. For example, if consumers cannot significantly adjust their purchase volume despite price changes, consumers will bear a larger tax burden regardless of which party is taxed. When the tax is imposed on producers, the demand for price increases is reflected more strongly, and the new price will be set at a level much higher than the original. In other words, a tax on producers is largely passed on to consumers. However, when a tax is imposed on consumers, the demand for price reductions is not well reflected, so prices do not fall significantly. As a result, consumers end up bearing most of the tax burden.
Additionally, when producers attempt to pass the tax burden onto consumers, the extent to which consumers accept this is also a key factor. For example, with essential goods, consumers are less sensitive to price increases, allowing producers to easily pass the tax burden onto them. Conversely, with luxury goods or products for which there are many substitutes, consumers are highly sensitive to price increases and are more likely to reduce demand or switch to other goods. In such situations, producers end up bearing a significant portion of the tax burden.
Due to this phenomenon of tax shifting, the government inevitably faces difficulties in identifying who the true bearer of the tax burden is. If this shifting phenomenon is not sufficiently taken into account when designing tax policies, certain groups may end up bearing an excessive tax burden or economic imbalances may worsen, contrary to the original intent. Since this has the potential to undermine the fairness and efficiency of taxation, it is crucial for policymakers to accurately understand and consider the mechanisms of tax shifting.
