Started a new venture, and figuring out adulting?
Bills, rent, and taxes, everything is overwhelming and super new.
If we think about it, no one prepares us for this phase of life. Amidst all the moving chaos, these new responsibilities hit us hard.
Bills and rent payments are no rocket science, but tax is a tough one. We need to comprehend what are taxes why are they imposed and most importantly, how does it affect an entrepreneur.
What is an imposed tax?
Before getting into details, firstly we must understand briefed version of what a tax is, and why is it levied on the people.
A tax is defined as the surcharge collected by the government from every legal individual of the country. There are various types of taxes applied, in a broader prospect it is divided into various categories
- Income tax
- Sales tax
- Property tax
Tax is imposed on various citizens and institutions in order to generate capital that is used for running the country. It is a vital practice that helps in accumulation of the funds. They in turn provide us with services that are accessible for the general public, for example, ambulatory services, police, etc.
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The tax imposed on the sellers of goods
Firstly, let’s comprehend the overall effect of tax imposition concerning the demand and supply curve.
Taxes are imposed on two levels
When we talk about the micro-level, it encompasses specific products or services. Let’s have a look on the demand and supply curve.
For instance, the charges are levied on gas, petrol, or other items sold. The supply curve intersects at the y-axis point, the addition of price, in turn, shifts the curve to an upper position by the tax charged.
Here’s an example, let’s suppose that the supply curve has an intersection point at USD 3 and USD 5 as a sales tax was imposed, the supply slope would not change but it will intersect at USD 8 instead.
This changes the intersection, the supply curve then falls on a different/ new point on the demand curve. This marks a change in the level of quantity supplied on a lower equilibrium with having a new price at a better equilibrium.
In this kind of imposition of taxes, there is a possibility of an increment in income tax. It is less complicated as compared to the micro- level imposition of tax. When the citizens have less income to spend, we see that the demand curve shifts down. It makes a brand new equilibrium of the demand and supply at lower price and quantity.
Effect and incidence of tax on buyers and sellers
In a nutshell, tax surges the amount the buyers pay and falls the amount seller obtains by lower than the tax.
Every time the tax has a new equilibrium it is seen that the buyers compensate more, in terms of paying. Furthermore, the sellers receive less amount for their sold item.
To sum it up, since the tax is not imposed on the buyers, the quantity in demand doesn’t change at any price resulting in no difference in the demand curve. On the contrary, when tax is levied on sellers, the business becomes less profitable at a certain price, thus shifting the supply curve.