Economists and state legislators disagree about who pays a sales tax, the business ringing up the sale or the shopper handing over the cash. Economists think that, if the legislators increase a sales tax rate, then the burden of the tax can fall on either party, depending on the nature of the market for the good being sold.
The EconModel analysis of this issue has the following steps:
Draw and explain the demand curve, the supply curve, and the supply curve plus tax.
Explain why the equilibrium quantity is where the demand curve intersects with the supply curve plus tax.
Show that sales tax is effectively split between the supplier and the purchaser.
Something to Think About
Nominally, the employer and employee each pay one-half of the Social Security taxes associated with an employee. Who really pays Social Security taxes? Would it change the effective burden of a 6% sales tax if it were divided into two 3% taxes, one "paid by the purchaser" and one "paid by the merchant"?
Show that the split of the tax between the supplier and the purchaser depends on the slopes of the demand and supply curves.
Find the tax rate that maximizes tax revenues.
Show that tax revenues can actually increase when tax rates are cut.
Classic Economic Models
Overview of Micro Models
Overview of Macro Models