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to the rectangle P1BCP0. This tax burden is completely shifted forward to the consumer, because the difference between the price paid before and the price paid after the tax by the consumer coincides exactly with the indicated price increase P0P1. Producer or vendor, by the contrary, goes on receiving the original price P0.

Figure Nº 1

Price (P)

VAT Revenue

Excess burden

P1 Po





Supply Price with VAT Supply Price without VAT

Demand with VAT Demand without VAT



Q1 Qo

Quantity (Q)

Besides, in the figure can be observed that purchasers suffer an “excess burden” produce by the tax, equal to the triangle ABC. This type of welfare cost is usually subject to measurement in the studies of tax incidence and/or estimations of the marginal cost of revenues for the government, but it is not subject to calculus in the usual estimation of sector tax burden. What is measured as accountable to the sector is the rectangle P1BCP0 obtained by the government, under the premise that no matter who finally suffer the tax burden, who paid it are firms belonging to the Agricultural Sector.

Finally, the interpretation that measurement of tax burden should be assigned to the Agricultural Sector no matter who will suffer the tax burden at the end of Stage III, could be understood to violate the accounting version of compensation between liabilities and fiscal credits when at the last stage the sector receives the whole price from consumers. However, firms belonging to each stage of production should face the payment of the corresponding net tax liability to the tax administration agency22, while some firms could also be burden by fiscal credits higher than liabilities, differences that are not rebate by the government.

2) VAT: Agricultural Sector production sold to domestic market only, demand curve with normal decreasing slope (negative price-elasticity) and supply curve with normal increasing cost (positive price-elasticity)

Case 4 simulates the “normal” case of any domestic good (not international tradable good), that shows demand and supply curves with decreasing and increasing slope, respectively, as the title indicates. Figure Nº 2 illustrates the case.

22 Actually this is the usual cited advantage of VAT in comparison with the Retail Sale Tax – in addition to the “vendor-purchaser’s conflict of interests” that improves the enforcement of the tax – because the government will obtain something up stream in case of evasion at the retail level (that would be equivalent to give a “tax exemption” treatment at final stage).

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