The land question in smallholder development in South Africa - Institutional Constraints to Small Farmer Development in Southern Africa - page 200

It should be noted that both t s and t b are proportions or shares of the absolute size of the
tax imposed. In that case, both should sum to unity according to the following relationship:

t s + t b = 1 (3)

Developing further the idea of the tax burden, it is important to note that although the
buyer eventually pays P 1, the difference between what the buyer was willing to pay (P 2 ) and
what she eventually pays (P 1 ) does not all accrue to the seller because of the tax (P 1 - P 2 )
which accrues to the government. In Figure 9.1, this corresponds to areas A and B. While
the buyer bears the portion B, the seller bears the portion A. As a result of paying these
taxes, both the seller and the buyer incur costs equivalent to losses in the producer and
consumer surpluses respectively. The loss in consumer surplus is equivalent to the area D,
while the loss in producer surplus is equivalent to the area C.

It is usually of both empirical and policy interest which of the parties incurs the most cost
from the imposition of the tax. That is, who bears the bulk of the burden of tax given the
relation above? In other words, which is greater, t s or t b ? There is no fixed rule on who bears
the most burden of the imposed tax. As indicated earlier, this would depend on the slope of
the demand and supply curves (Frank, 1994; Mankiw, 1998). When elasticity is explained
in its commonplace, lay meaning as the responsiveness of the quantity bought to changes in
price from the differential viewpoints of the buyer and seller, the tax impacts can be a little
clearer. According to Frank (1994), if the supply is highly unresponsive to changes in price
(vertical to the horizontal or almost so), then t b (the tax burden on the buyer) is close to
zero while t s (the tax burden on the seller) is close to unity. This means that the seller bears
the bulk of the tax. On the other hand, if demand is highly unresponsive to price, that is
almost horizontal, then t s will approach zero while t b will be almost unity.

In the situations above, a relatively inelastic supply schedule implies fixed supply and
absence of close substitutes to which the buyer can turn. On the other hand, a relatively
elastic supply curve implies that supply is highly variable and that the buyer can choose
among substitutes. In the first case, the buyers bear most of the burden of the tax. In the
other case, the suppliers do not have any alternative than to go on supplying the product.
As a result, the bulk of the tax burden falls on them. This provides some endorsement to the
notion that 'a tax tends to fall most heavily on the side of the market that can least escape
it' (Frank, 1994). Similar points are also made with respect to capital gains tax, suggesting
that the poorer segment of the economy absorbs the most tax while the wealthier segment
has the ability to avoid or delay capital transactions so that capital gains accrue without
being realized.

The foregoing statement about who feels the pinch most compels policymakers to be
extremely cautious in deciding on any tax to raise revenue for the government. The common