Taxes on a Buyer and a Seller

Taxes on a Buyer and a Seller

Governments use taxes as an imposed financial charge or levy upon an individual or legal entity to raise revenue for public-purposes.

The affects of taxes on the economy in a supply and demand model can be viewed by examining how the taxes affect the equilibrium curve. Taxes tend to shift the curve either up or down, creating a new equilibrium to be absorbed in the market by both the buyer and seller. The determination of who bears the tax burden is called tax incidence by economists.

Taxes on a Buyer

Tax on Buyer


Taxes on a Buyer are commonly excised through a sales tax as a percentage of the price of the good.

The imposed cost by the government affects the equilibrium by shifting the demand curve downward by the size of the tax, as shown in Graph A here.

The tax burden is shared by the seller and buyer; the seller receives less for the good in the new tax equilibrium, while the buyer pays more for the good.





Taxes on the Seller

Tax on Seller


Taxes on the Seller are not directly levied on the buyer but on the seller.

This creates an upward shift in the supply curve by the amount of the tax, and creates a new equilibrium in the market.

With the upward shift of the supply curve the demand moves from a greater quantity to a lesser quantity.

This increases the buyer's purchase price while simultaneously lowering the amount received by the seller.

The burden of the tax is still shared by the seller and buyer as shown in Graph B here.