Question

In 2011, the Cuban government enacted an 8 percent tax on the purchase of real estate, with the tax “split between the buyer and seller.” Is it likely that the tax will actually be split 50‐50 between buyers and sellers? Use an appropriate diagram as the basis for your answer.

Answer 1

These incident can be best explained by the following diagram:

The government puts a 8% tax on the purchase of real estate, the legal incidence is on the seller initially. The local real estate market may have many sellers, and be highly competitive. So, out of fear of loosing sales, sellers will decide to put up the price by only 4% tax, and pay the balance of 4% tax to the government themselves. So here, after the 8% tax enacted, the sellers raise the price to P₁ which includes only 4% tax raise and that will be paid by buyers. Remaining 4% tax will be paid by sellers. Therefore,

Tax burdern on consumer= Tax burden on producer.