OBJECTIVE

This term paper is being done in order to check and determine the effect of various factors of the direct tax that have an impact on the consumer equilibrium. The main objective of this term paper is as under:

To determine what is direct tax and consumer equilibrium

Analysis of articles

Impact of direct tax and other factors on consumer equilibrium.

INTRODUCTION

In introduction , we will start with the basic like- what is direct tax and what is consumer equilibrium. We will discuss these two in a elaborated manner.

DIRECT TAX

CONSUMER EQUILIBRIUM

DIRECT TAX

The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.In the general sense, a direct tax is one paid directly to the government by the persons. on whom it is imposed (often accompanied by a tax return filed by the taxpayer). Examples include some income taxes, some corporate taxes, and transfer taxes such as estate (inheritance) tax and gift tax. In this sense, a direct tax is contrasted with an indirect tax or “collected” tax (such as sales tax or value added tax (VAT)); a “collected” tax is one which is collected by intermediaries who turn over the proceeds to the government and file the related tax return. Some commentators have argued that “a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.

The direct tax definition is not complete until we do not define or throw some light on indirect tax, thus-

INDIRECT TAX

A tax that is not assessed on and collected from those who are intended to bear it. Unlike a direct tax , it cannot take individual circumstances into account. Although levied on

Producers , the burden of an indirect tax may be ‘shift’ to consumers.

Ex: value added tax, sales tax, payroll tax and excise duties

CONSUMER EQUILIBRIUM

When consumers make choices about the quantity of goods and services to consume, it is presumed that their objective is to maximize total utility. In maximizing total utility, the consumer faces a number of constraints, the most important of which are the consumer’s income and the prices of the goods and services that the consumer wishes to consume. The consumer’s effort to maximize total utility, subject to these constraints, is referred to as the consumer’s problem. The solution to the consumer’s problem, which entails decisions about how much the consumer will consume of a number of goods and services, is referred to as consumer equilibrium.

Determination of consumer equilibrium. Consider the simple case of a consumer who cares about consuming only two goods: good 1 and good 2. This consumer knows the prices of goods 1 and 2 and has a fixed income or budget that can be used to purchase quantities of goods 1 and 2. The consumer will purchase quantities of goods 1 and 2 so as to completely exhaust the budget for such purchases. The actual quantities purchased of each good are determined by the condition for consumer equilibrium, which isÂ

This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent on good 2. If, for example, the marginal utility per dollar spent on good 1 were higher than the marginal utility per dollar spent on good 2, then it would make sense for the consumer to purchase more of good 1 rather than purchasing any more of good 2. After purchasing more and more of good 1, the marginal utility of good 1 will eventually fall due to the law of diminishing marginal utility, so that the marginal utility per dollar spent on good 1 will eventually equal that of good 2. Of course, the amount purchased of goods 1 and 2 cannot be limitless and will depend not only on the marginal utilities per dollar spent, but also on the consumer’s budget.

LITERATURE REVIEW

Hegde, Prakash and Barve, Nachiket, June 27,2010, “Impact of direct tax code on individual”, BUISNESS LINE says that Though most of the existing provisions of the income-tax law are finding place in the DTC, many provisions are new or modified that will affect the individuals significantly.The prominent ones are like DTC proposed significant reduction in individual income-tax by increasing tax slabs – 30 per cent tax rate at an income level of Rs 25 lakh (present – Rs 8 lakh).If proposed tax slabs and rates are implemented, then taxpayer’s take-home pay may see a substantial jump. However, in view of relaxation or rollbacks of other tax proposals, one has to wait and watch whether Government still intends to offer the proposed tax slabs and rates.