Top 4 Theories of Tax Shifting

by : Moheeth M | category : Tax Shifting

This article throws light upon the top four theories of tax
shifting. The theories are: 1. Concentration Theory 2. The
Diffusion Theory 3. Demand and Supply Theory of
Incidence 4. Musgraves Approach.
Tax Shifting # 1. Concentration Theory:
This theory was advocated by the physiocratic school of thought in
France during the middle of the 18 th century. Physiocrats believed
that there is an inherent(yang melekat) tendency(kecenderungan)
for all taxes to be concentrated on objects or classes which enjoy a
surplus. Physiocrats believed that agriculture is the only productive
sector.
According to the human labour applied in land, is able to generate a
surplus and this surplus is called the net product. In industry, no
surplus is generated. Trade and commerce were also considered as
sterile by the physiocrats.
Nature has given land a blessing in the form of fertility. Hence,
labour when applied to land is able to generate a surplus in the form
of net product. This net product is appropriated by the landlords.
Hence, physiocrats believed that in an economy, those could bear
the taxes, which are appropriating a surplus.
Hence on whatever class the tax imposed, the payment would
ultimately be made by the landed proprietors. All other classes and
occupations are sterile. They did not yield any surplus, so that they
cannot bear the burden of taxation.
If a tax was levied on these sterile classes, it will be shifted and reshifted and ultimately fell on the landlords, who extracts a surplus.
Only a tax imposed on landlords cant be shifted further because tax
fall upon surplus income and it is paid out of it.
According to the physiocrats the shifting process involves friction
and waste. Hence, it is better to impose all taxes on land directly or

rather on the net product of land lord, than indirectly through other
source. Hence, the physiocrats advocated that the government
should concentrate on a single tax on economic rent earned by
landlord. They also stood in favour of abolishing the diversified tax
structure.
This theory with some modification was accepted by the classical
economists Adam Smith and David Ricardo. According to them
taxes could rest only on net income or rent. Wages and profits were
for the most part cost of production. Since, labour and business
obtained little net income; most taxes imposed on them had to be
shifted through an increase in prices and wages.(harga dan gaji)
Tax Shifting # 2. The Diffusion Theory:
The diffusion theory was developed by the French writer like
Canard and Mansfield. Diffusion theory is developed, contrary to
the concentration theory.
This theory states that taxes equate and diffuse themselves. This
theory holds that government may impose such taxes as are most
easily assessed and collected and will cause the least obstruction to
national wealth.
It favours indirect taxation, trusting to the laws of trade to
distribute the burden of taxation over the whole population. The
diffusion theory of taxation is based on the assumption of perfect
competition and complete mobility of all economic agents.
According to this theory, the individuals from whom the tax is
collected will not ultimately bear the entire burden of taxation. The
burden will be shifted on to other classes and finally it will be
diffused all over the society, untraceable.
In the words of Mansfield a tax is like a stone falling into a lake and
making a circle, till one circle produces and gives motion to another
and the whole circumference is agitated from the center.
When a tax is imposed, it will be shifted and re-shifted; in such a
manner that no one can escape from its incidence. When a commodity is subject to taxation, the process of exchange shift the tax

burden, extensively. This process of diffusion leads to equilibrium

when the tax burden is equally distributed among all taxpayers. In
this context, Canard made a beautiful narration of diffusion theory.
He states the imposition of tax is just like extracting of blood from
one of veins of a human being, although it is taken from a single
vein, the loss in spread all over the body, and the body remains in
equilibrium. However, Prof. Dalton disagreed with this theory. He
believes that such an approach only tries to run away from the basic
problem of ascertaining the incidence of tax. Walker also criticized
this theory.
According to walker, this theory is based upon the assumption of
perfect competition, which is a myth. The diffusion theory of
incidence is shallow and misleading. It is shallow because it avoids
the real difficulties in tracing out the incidence of a tax.
It simply states that the incidence in non-traceable. It is misleading
because it assumes a state of perfect mobility of factors and the
unrealistic assumption of perfect competition. Rather diffusion
theory is a confession of ignorance on the part of the advocates in
tracing the path followed by particular taxes.
Tax Shifting # 3. Demand and Supply Theory of Incidence:
The extent, to which the monetary burden of a tax is shifted, either
forward or backward, may be affected by the nature of the market
structure within which the seller or buyer functions.
The possibility of shifting of tax depends to a large extent on the
elasticity of demand and supply of the object of taxation. The
demand and supply theory of incidence is considered as the most
important solution to the problem of shifting of tax burden.
Invariably, this theory is based upon the neo-classical theory of
value and price, as stated by Prof. Alfred Marshall.
Prof. Seligman and Prof. Edge-worth applied this neo-classical
theory of value and price in tax shifting under different demand and
supply conditions.

This theory also asserts that tax incidence can be shifted only
through a sale or purchase transaction. That is only through price
revision. Price revision in turn is determined by the relative value of
demand and supply.
Hence to summarizes, the sharing of the incidence between the
buyer and seller will be determined by the demand and supply
elasticitys. The seller always tries to shift the tax burden upon the
shoulders of consumers.
At the same-time the buyer may resist the shifting of the tax burden.
Hence, the degree and character of shifting therefore depend upon
the respective bargaining power of both seller and buyer.
Nature of Demand and Supply and Shifting of Tax:
As stated earlier, shifting of a tax depends to a great extent on the
elasticity of demand and supply of the object of taxation.
Generally speaking, the greater the elasticity of demand of an
article, the lesser is the chance of its being shifted to the consumer.
Likewise, greater the elasticity of supply, the greater is the chance to
shift the burden on to consumers when supply is elastic the
bargaining power of the seller is greater.
He can increase or decrease supply according to circumstances. By
withholding supply he can keep up the price and vice-versa.
Similarly, the bargaining power of the buyer is greater, when
demand is elastic. The buyer is in a position to restrict demand or
increase demand without much difficulty.
If the buyer feels that the price of an article is too high, he can
reduce demand or postpone demand and force the seller to accept a
reduced price.
Hence this theory of incidence can be explained under five
extreme situation of elasticity of demand and supply:
(a) If the demand of a product is perfectly elastic, the consumer will
demand the same quantity at any price. In this situation, the
consumer will bear the entire money burden of the tax.

(b) If the taxed commodities demand is perfectly elastic, the entire

incidence will be borne by the producer or seller.
(c) If the taxed commodities supply is perfectly inelastic, the entire
incidence will fall upon the seller.
(d) On the other hand if the supply is perfectly elastic, the incidence
will be on the buyer or consumer.
(e) A tax on an article which is jointly produced or jointly demanded
with other articles can be shifted in part to the producer or consumer of the other commodity that enters in the joint relations. Let
us take an illustration.
Wine and bottles are jointly demanded. If a tax is levied on wine
and the wine producer cannot shift it to the consumer, he may try to
obtain the bottles at lower prices and thus cause the burden of the
tax to be shared by the maker of the bottle also.
Tax Shifting # 4. Fiscal Incidence and Its Measurement
Musgraves Approach:
Prof. Richard. A. Musgrave popularized a new concept of incidence.
He point out that incidence takes into account the distributional
consequence of budgetary policy change.
Prof. Musgrave defined the term incidence as the resulting change
in the distribution of income available for private use, which arises
as a result of changes in budget policy. That is changes in policy of
taxation and public expenditure.
He pointed out that whenever budget policy is changed, it
may result into three important effects:
Firstly, it may affect the distribution income between different
sections of communities.
Secondly, it may lead to changes in the transfer of resources from
private to public use and thirdly it may lead to changes in output
According to Musgrave, the term incidence is used to denote the
first type of effect.

To be more specific, resource transfer may occur without taxes and

taxes may be imposed without resource transfer. However, the
resulting changes in the distribution of income have been referred
as incidence.
Resource transfer implies that when a tax is imposed on the people,
resources are transferred to the public sector from private use.
Output effect imply that, imposition of a tax may lead to a change in
factor input and hence in total output. For example, let us assume
that a progressive income tax is imposed.
This may induce the workers to work less or work more leading to a
change in the rate of savings and investments and thereby in rate of
output growth. Likewise, change in budgetary policy may affect the
distribution of income between different sections of the community.
All these effects interact. Thus the distributional effect of a
particular budget measure depends on their effects on capacity
output and employment just as the latter depend on concurrent
changes in distribution. However, in the analysis of incidence
Musgrave takes into consideration the distributional effect of tax
and expenditure policies of the budget.
A. Statutory and Economic Incidence:
It is a fact that taxes are mandatory imposition and not a voluntary
purchase payment. Taxes always impose burden, which the tax
payers try to avoid or pass on to others shoulders.
When a tax is imposed, it involves a legal liability for payment,
which may rest upon individual households as owner of the firm,
employees or as consumers of their product. This legal liability for
payment of tax is called statutory incidence. This involves two
considerations.
Firstly, in the end, entire tax burden must be borne by individuals.
Though taxes may be collected from business firms their ultimate
burden must be traced to individual households as owners of firms,
as employees or as consumers of their product.

Secondly, the final burden distribution may differ from that of

statutory liabilities, whether the tax is imposed on individuals or
firms.
Due to the imposition of a tax, individuals as well as firms may
adjust their sales and purchase, thus affecting the position of others.
The person on whom statutory liability for payments rest may try to
pass on the burden to others by changing the terms under which
they are willing to trade.
Hence, whenever a tax is imposed a chain of adjustments will take
place in the sphere of transactions. For example, an automobile
excise duty levied on the seller may cause them to raise their prices
hoping to pass the burden of tax to the buyers, who in turn will
attempt to avoid it by substituting other purchases.
Imposition of an income tax may lead to reduced hours of work,
thereby driving up the gross wage rate and burdening the
consumers. In each case taxpayers ability to make such
adjustments will depend on the willingness of the other transactor
to go along. If the seller raises the price, the buyer will fight back by
purchasing less.
Hence the outcome will depend on the response of the two parties.
In essence, the resulting chain of adjustments may lead to a final
distribution of burden, which Musgrave calls as economic incidence
which differs greatly from statutory incidence.
B. Types of Tax Incidence:
Prof. Musgrave points out six concepts of incidence depending upon
the types of budget policy considered. It is assumed that the budget
changes occur with a classical system, where full employment is
maintained automatically.
In such a situation, whenever a budgetary policy is
changed, the distributional changes in income available
for private use can be explained in the following way:
(a) Specific Tax Incidence:

One way to examine the concept of incidence is considering the

distributional effect of imposing a particular tax, while holding
public expenditure constant. That is changes in the distribution of
income resulting from changes in particular tax function (say for
example, personal income tax), while keeping public expenditure
constant in real terms is called specific tax incidence.
Musgrave also called it as Absolute Incidence. Let us analyses
the same by taking an example. Suppose, income tax is reduced
without thereby a corresponding change in expenditure or an
offsetting change in other taxes.
As a result income tax yield falls in both real and money terms.
Private expenditure on the other hand increases due to increased
income on the part of the individuals. This results in rise in price
and cost and consequent increase in public expenditure in money
terms to maintain real purchase.
In response to rise in income, tax yield will rise. But the initial
losses are not fully recouped. The government is therefore forced to
increase deficit spending to maintain the level of expenditure.
Then an inflationary process sets in motion. On the other hand
when income tax rates are increased, there is a decrease in private
expenditure due to reduction in income in the hands of the people.
This may generate a deflationary situation. Both inflationary and
deflationary situation influence the distribution of income and
wealth. The specific tax incidence thus produces two types of
incidence. One is the incidence due to a change in a particular tax
and the second is the incidence due to inflation or deflation.
(b) Differential Tax Incidence:
This refers to the distributional effect that result when one tax is
substituted for another, keeping expenditure constant, and assuming that the money income of the two taxes is the same.
When one tax is substituted for another and revenue yield remain
unchanged, it implies that the amount of public expenditure will

remain the same. The substitution of equal yield taxes thus defined
will be a balanced budget operation.
Let us take an illustration. Assuming that the government replaces
Rs. 50/- millions of income tax revenue with a cigarette excise
yielding the same amount of revenue. Fundamentally, this tax
policy change involves no resource transfer to public use and
imposes no net burden on the private sector.
It merely involves a redistribution of tax burden among households.
Households, whose income tax liability is reduced, will gain. On the
other hand, others with high cigarette purchases will lose. If we go
beyond, tobacco growers and cigarette workers will lose. Whereas
others producing the output purchased by the former income
taxpayers stand to gain.
Hence, the resulting total change in the state of distribution is
referred to as differential tax incidence. It measures the difference
in the distributional effects of financing a given expenditure by one
tax or the other.
(c) Specific Expenditure Incidence:
Here is a situation when public expenditure changes whereas the
tax rate structure and assessment formula remain constant. Under
such a situation, the effect of change in public expenditure upon
distribution is called specific expenditure incidence.
Increased public expenditure result in increased resource transfer
to public use, as a result of increase in income of the people, in spite
of constant tax functions. But the gain in yield will fall short of what
is needed by the government. This will result in an inflationary
process.
On the other hand, a decrease in expenditure will reduce the income
of the people, and generate a deflationary situation by reducing
aggregate demand for goods and services. In this way, changes in
expenditure affect the distribution process in two ways changes
due to public expenditure and changes due to inflation and

deflation which may arise due to changes in public expenditure

policy.
(d) Differential Expenditure Incidence:
Under this concept, we hold the tax function constant and consider
the changes in expenditure on different items under a balanced
budget to avoid the impact of inflation and deflation.
The resulting changes in the distribution of income disposable for
private use are referred to as differential expenditure incidence.
Under a balanced budget policy, an increase in public expenditure
in some direction is offseted by a decrease in expenditure in some
other direction.
Such a differential expenditure, changes the relative factor and
product prices. As a result it effects the distribution of income
available for private use.
However, Musgrave admits that the concept of specific expenditure
incidence and differential expenditure incidence is not much useful
and significant as the concept of differential tax incidence, to
analyses the problem of incidence of taxation and transfer of
resources.
(e) Balanced Budget Incidence:
It is a situation in which changes in household income position is
analyzed by taking the combined effect of tax and expenditure
changes. As a result of this, income available to particular household for private use will be affected not only by tax but also by
expenditure measures. For example, in the case of transfer
payments private incomes are added to just as they are reduced by
taxes.
In the case of provision for public services, the necessary purchase
(either the service of civil servants or products) effect the
distribution of private income through their effect on earnings.
Thus the expenditure side of the budget has its effect on private
incomes as taxes do have. Since the taxes and expenditure effects
occur simultaneously, they cannot be separated in this case.

tax insidence ini merujuk pd distribusi akhir beban pajak...

dilihat dari sudut pandang ekonomi, dgn adanya pajak dpt menyebabkan
harga relatif berubah, dan perubahan pajak dpt mempengaruhi kesejahteraan
rumah tangga. rumah tangga mungkin merasakan dampak pajak pada sisi
sumber
atau
sisi
penggunaan
dari
persamaan
pendapatan.
Pada sisi sumber, rumah tangga menderita jika laba atau upah bersih
yg
diterimanya
turun,
pada sisi penggunaan, suatu rumah tangga menderita jika harga barang2 yg
dibelinya
naik,
jika penghasilan kita tetap sama,tp harga barang yg kita beli naik 2 kali lipat,
kita berada pada posisi yg sama dg jika penghasilan kita dipotong 50% dan
harga
tidak
berubah..
Pendeknya,, pengenaan pajak atau perubahan pajak bisa mengubah
prilaku. perubahan prilaku bisa mempengaruhi penawaran dan permintaan di
pasar dan menyebabkan harga berubah. ketika harga berubah dlm pasar
input atau output, beberapa rumah tangga dibuat lebih beruntung, dan
beberapa
merugi.
perubahan
akhir
ini
yg
menentukan
beban
pajak
itu...
tax burden merupakan perekayasaan agar beban pajak dapat ditekan
serendah mungkin dengan memanfaatkan peraturan yang ada,dengan
memaksimalkan penghasilan setelah pajak karena pajak merupakan unsur
pengurang.
Tax Shifting itu kalo gak salah penggeseran beban pajak baik ke depan
(forward shifting) atau ke belakang (backward shifting). Biasanya tax shifting
ada pada pajak konsumsi (consumption tax) atau PPN , yaitu bagaimana
menggeser beban pajak kepada pihak pembeli. Dalam tax planning, tax
shifting ini masih dalam koridor tax avoidance dimana terdapat penghematan
pajak yang harus dibayar sendiri atau yang harus dibayar oleh pihak lain.

tax planning umumnya selalu dimulai dengan meyakinkan

apakah suatu transaksi atau fenomena terkena pajak. Kalau
fenomena tersebut terkena pajak, apakah dapat diupayakan untuk
dikecualikan atau dikurangi jumlah pajaknya, selanjutnya apakah
pembayaran pajak dimaksud dapat ditunda pembayarannya, dan
lain sebagainya.

oleh karena itu, setiap WP akan membuat rencana pengenaan

pajak atas setiap tindakan (taxable event) secara seksama. Dengan
demikian, bisa dikatakan bahwa tax planning adalah proses
pengambilan faktor pajak yang relevan dan faktor nonpajak yang
material untuk menentukan :
a. Apakah,
b. Kapan,
c. Bagaimana,
d. Dengan Siapa (pihak mana),
dilakukan transaksi, operasi, dan hubungan dagang yang
memungkinkan tercapainya beban pajak pada tax events yang
serendah mungkin dan sejalan dengan tercapainya tujuan
perusahaan (Barry Spitz: 1983)
untuk kasus pemberian cuma-cuma, daripada dikenakan PPN
atas pemberian cuma-cuma maka dianggap sebagai diskon
sehingga bebas PPN
MIsalnya metode penyusutan mau Garis Lurus atau Dobel
Declining..??
tergantung, kalau perusahaan mau biaya gede di depan, pakai
dobel declining, tapi kalau maunya sama rata ya... pakai Garis
Lurus... kecuali utk bangunan musti pakai Garis Lurus...
Intinya, Tax Planning yg baik tidak melanggar aturan yg berlaku,
tapi pembayaran pajaknya optimal... (kalau gak perlu bayar pajak,
ngapain bayar? Kalau bayarnya bisa 2%,ngapain juga bayar 4%).
sekali lagi tentunya, tidak melanggar aturan pajak yg berlaku rekan.

Sophar Lumbantoruan dalam bukunya akuntansi pajak ( 1996:

489
)
strategi
tax
planning
yaitu
:
Pergeseran pajak (shifting), ialah pemindahan atau mentransfer
beban
pajak
dari subjek pajak kepada pihak lain, dengan demikian, orang atau
badan
yang
dikenakan
pajak
mungkin
sekali
tidak
menanggungnya.
Kapitalisasi, ialah pengurangan harga objek pajak sama dengan
jumlah
pajak
yang
akan
dibayarkan
kemudian
oleh
pembeli.

 Transformasi, ialah cara pengelakan pajak yang dilakukan oleh

pabrikan
dengan cara menanggung beban pajak yang dikenakan
terhadapnya.
Tax Evasion, ialah penghindaran pajak dengan melanggar
ketentuan
peraturan
perpajakan.
Tax Avoidance, ialah penghindaran pajak dengan menuruti
peraturan yang ada.