4.3 Elasticity Matters for Excise

Taxes

We have spent much time examining price elasticity (of both demand and
supply) and how to measure it. But why should we care about this? In this
section, we explore the important concept of tax incidence and show that
elasticity is crucial to determining whether consumers or producers (or
both) end up bearing the burden of excise taxes.

The federal and provincial governments in Canada levy special sales taxes
called excise taxes on many products, such as cigarettes, alcohol, and
gasoline. At the point of sale of the product, the sellers collect the tax on
behalf of the government and then remit the tax collections. When the
sellers write their cheques to the government, these firms feel that they
are the ones paying the whole tax. Consumers, however, argue that
are the ones shouldering the burden of the tax because the tax causes the
price of the product to rise. Who is correct? Who actually bears the
burden of the tax?

The question of who bears the burden of a tax is called the question of
incidence. A straightforward application of demand-and-supply
analysis will show that tax incidence has nothing to do with whether the
government collects the tax directly from consumers or from firms.

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