Essay on Taxes

Effects of Taxes on Economy:

Economic aspects of taxation have a direct influence on the demand and supply in specific industries, in which the latter are imposed, and on the entire economy at large. Taxes, as described the Lexico Publishing Group (2007), are “sum[s] of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc.” Thus, the purpose of taxes is to take away the money from producers for their possibility of producing and selling the product, or from the consumers for their possibility to buy the product. In any case, both parties suffer financial losses. Thus, taxes have a negative impact on the economic aspects of an industry.

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Dan Frake (2006) and Francois Joseph de Kermadec (2004) have analyzed the prices of computers produced by the Apple Corporation, coming up to the conclusion that regardless of the public convention of Mac’s being more expensive, the detailed comparison of Mac’s and PC’s have demonstrated the opposite. The false public opinion comes from the fact that Mac’s are not offered in light versions, while PC are supplied in the various version from extra-light to heavy-professional. Now, let me demonstrate the economic model of this industry from the standpoint of taxation.

Taxes, as mentioned earlier, would affect the demand and supply in a negative way. The short explanation is the following: consumers have to buy the product at a higher price than the initial price, and suppliers have to receive smaller revenue for the products they sell. In economic terms, however, the effect of taxation is the following. When a tax is imposed on any party – demand or supply, – the curve of this party shifts left. The new curve is shifted to the left to the point where its vertical distance to the initial curve equals the tax for one product unit. Interestingly, regardless of on whom the tax is imposed, the economic effect is the same, suppliers receive less and consumers pay more. If a 10% tax is imposed on the producers, the supply curve shifts left until its vertical distance to the initial supply curve is 10% of the unit price. As a result, the suppliers have to supply a smaller number of units and receive a smaller amount for each unit. The consumers in this model would pay a higher price for the units that are not readily available on the market. And if the tax is levied on the consumers, the curve shifts left the same way, and the end effect of taxation is the same: consumers pay more, and suppliers receive less.

In a taxed industry or market, as opposed to the ideal market environment, the equilibrium point is never achieved. The equilibrium point is that perfect combination of price and quantity, at which both the suppliers and the consumers are satisfied. The equilibrium point forms naturally on the market, and any intrusion from without – a tax in our case – influences the transaction price and quantity in a negative way. However, the natural equilibrium point stays the same regardless of the intrusions from the government. What taxes do is they shift the price and quantity artificially, forming the new prices and quantities of transaction, but not equilibrium. As the diagram shows, the taxes make the consumers buy the product at a higher price, while the producers are not willing to sell it at that price in quantities demanded. In order to pay the tax, the producer and the consumer have to split the tax in halves. Graphically, it is shown to the left of the equilibrium point; as the supply and demand diverge, the new quantity Qt is formed as the vertical difference between supply and demand equals to the unit tax. Thus, the consumer will pay the amount received by the producer plus tax (regardless of who actually pays the tax). Thus, at a new smaller quantity, suppliers satisfy their need to sell less at lower price, and consumers satisfy their need to buy less at the higher price, which explains the new smaller quantity.

Getting back to the computer industry, it could happen that as new technologies develop, scientists invent some hyper-powerful technology – nano-computers, – which would be relatively cheap compared to its features and parameters. In this hypothetical scenario, consumers would be no longer willing to buy regular computers at current prices, and the curve would significantly shift left. The result of this is the drop of equilibrium price and quantity. Such situation might invoke price floors inflicted by the government. In this case, suppliers would be prohibited from lowering the price. In that case, the price for regular computer would be higher than the equilibrium price. Thus, consumers would not want to buy products at that amount (for they could buy a nono-computer at the same price), while producers would be willing to sell more of computers at that artificial price. However, if producers were allowed to lower the price to equilibrium, they would sell some Qe quantity, but even with prices raised, they would only sell Qd, which is smaller than equilibrium quantity for reasons described above. Such market environment would create significant surplus of goods, and sellers would me forced to absorb it. In an opposite scenario, in which regular computers become very scarce, and the government sets a ceiling, consumers would search for more of that product, but the suppliers would not be able to cover their needs, for they would not be willing to sell the product at a price, lower than the equilibrium. Thus, ceilings and floors have a negative effect regardless of the market environment.

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