According to business dictionary, elasticity is a responsive measured in price or quantity. It is also a sensitivity of quantity towards changes of price and it is measured using the elasticity concept with a diagram of demand and supply curve. Why is this important? The importance is to explain the consumer and sellers respective behavior in the market; and also to show the intersection between demand and supply. The general calculation is shown below:
Percentage (%) of change in quantity
Elasticity = Percentage (%) of change in determinant
There are few reasons why elasticity is measured using percentage (%), it’s allows subject measured in different units and also changes in quantity due to change of price in currency value. Problems can be avoided in determining size of unit used. The changes can only be seen if an initial value is provided; for example if the price of the item is RM4 and RM1.20 additional will be significant but if the price is RM48.90 then the RM1.20 is insignificant change. Basically if an initial price is higher and changes are small, then the changes is insignificant, why is this happening? The answer is some consumer can’t really see the different in the price change. There are items that can be elastic and items that can be substitute for example mineral water, chocolate etc. but item that can’t be substitute is petrol, coffee, cigarettes. These are item even the price increase the demand is still the same as everybody that owns a car need petrol, if you are addicted to cigarette, even the price increase you will still buy it.
Elasticity that is normally used is divided to four types which is; price elasticity of demand, price elasticity of supply, income elasticity of demand and cross elasticity of demand. Everyone in supply chain will face taxes increase; for example if a supplier is burden with high tax the possibilities that they will pass the burden to manufacturer or consumer in terms of price increase but most of the time the finished product can’t take up the liability, somebody will have to carry it either manufacturer or retainer or find ways to deal with the tax issue.
BODY OF CONTENT
Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price will cause large changes in quantity consumed. If a curve is less elastic, then it will take large changes in price to effect a change in quantity consumed. Graphically, elasticity can be represented by the appearance of the supply or demand curve. A more elastic curve will be horizontal, and a less elastic curve will tilt more vertically. When talking about elasticity, the term “flat” refers to curves that are horizontal; a “flatter” elastic curve is closer to perfectly horizontal. As we have noted, elasticity can be roughly compared by looking at the relative steepness or flatness of a supply or demand curve. Thus, it makes sense that the formula for calculating elasticity is similar to the formula used for calculating slope. Instead of relating the actual prices and quantities of goods, however, elasticity shows the relationship between changes in price and quantity. To calculate the coefficient for elasticity, divide the percent change in quantity by the percent change in price:
Elasticity = (% Change in Quantity)/(% Change in Price)
The relationship between tax incidence and elasticity. The burden of a tax is generally shared by the producers and consumers in a market. In other words, the price that the consumer pays as a result of the tax (inclusive of the tax) is higher than what would exist in the market without the tax, but not by the entire amount of the tax. In addition, the price that the producer receives as a result of the tax (net of the tax) is lower than what would exist in the market without the tax, but not by the entire amount of the tax. (Exceptions to this occur when either supply or demand is perfectly elastic or perfectly inelastic.) This observation leads naturally to the question of what determines how the burden of a tax is shared between consumers and producers. The answer is that the relative burden of a tax on consumers versus producers corresponds to the relative price elasticity of demand versus price elasticity of supply.
Tax incidence is the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it. The burden of the tax is not dependent on whether the state collects the revenue from the producer or consumer, but on the price elasticity of supply and the price elasticity of demand. To understand how elasticities influence tax incidence, it is important to consider the two extreme scenarios and how the tax burden is distributed between the two parties.
Inelastic supply, elastic demand
In this situation, because supply is inelastic, the firm will produce the same quantity no matter what the price. Because demand is elastic, the consumer is very sensitive to price. A small increase in price leads to a large drop in the quantity demanded. The imposition of the tax causes the market price to increase and the quantity demanded to decrease. Because consumption is elastic, the price consumers pay doesn’t change very much. Because production is inelastic, the amount sold changes significantly. The producer is unable to pass the tax onto the consumer and the tax incidence falls on the producer.
Tax Incidence of Producer. In a scenario with inelastic supply and elastic demand, the tax burden falls disproportionately on suppliers.
Elastic supply, inelastic demand
Consumption is inelastic, so the consumer will consume near the same quantity no matter the price. The producer will be able to produce the same amount of the good, but will be able to increase the price by the amount of the tax. As a result, the entirety of the tax will be borne by the consumer.
Similarly elastic supply and demand
Generally consumers and producers are neither perfectly elastic nor inelastic, so the tax burden is shared between the two parties in varying proportions. If one party is comparatively more inelastic than the other, they will pay the majority of the tax.
Comparison of inelastic and elastic demand
All income tax information is summarized by KPMG Tax Services Sdn. Bhd., the Malaysian member firm of KPMG International, based on the Malaysian Income Tax Act, 1967 (the Act). Income tax is imposed on a territorial basis. Individuals, whether resident or non-resident in Malaysia, are taxed on income accruing in or derived from Malaysia. Foreign income remitted into Malaysia is exempted from tax. The income of a resident individual is subject to income tax at progressive rates after personal relief while the income of a non-resident individual is subject to income tax at the top marginal rate without personal relief.
Non-resident individuals may claim tax exemption on their Malaysian employment income if they exercise employment in Malaysia for a period or periods of 60 days or less in a calendar year or for a period of not more than 60 days if such period overlaps two calendar years.3 However, if the individuals who are exercising employment in Malaysia for more than 60 days but less than 183 days, and are tax residents of a country in which Malaysia has a double taxation treaty, exemption may be available provided other conditions as stipulated in the double taxation treaty are met. Malaysia has a current year basis of assessment. The basis period for a year of assessment coincides with the calendar year. The official currency of Malaysia is the Malaysian Ringgit (MYR).
Taxation is a means by which governments finance their expenditure by imposing charges on citizens and corporate entities. The main purpose of taxation is to accumulate funds for the functioning of the government machinate. All governments in the world cannot run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. In other words, a government can run its administrative set up only through public funding which is collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is very simple and obvious for proper functioning of a state. Taxes are charges levied against a citizen’s personal income or on property or for some specified activity. As such, one purpose of taxation is to increase in effectiveness and productivity of the nation as government is able to implement various social-economic development projects such as the construction of roads and bridges, schools, health facilities and provision of social services.
Another reason is that taxation assists in reducing consumption of unwanted goods. Taxes as such can be used as an effective tool to reduce the consumption of unwanted goods like alcohol. Higher taxes on such goods reduce the consumption as the price of the product will be very high for the consumers. Government also uses taxes as a way to protect local industries and as such make them more profitable. Increasing tariffs on imports and charging lower taxes to local products may boost the demand for goods and services produced by domestic industry. Taxes on imports, which are called tariffs, can be used by government to correct an unfavorable balance of payment situation by increasing the tariffs. This will result in imports becoming expensive and will cause a fall in demand for the imported goods.
There are various taxes that you will need to bear in mind if you are planning on relocating to Malaysia, and wish to draw up a budget and have a better idea of your net salary. Income tax, corporate tax, property tax, consumption tax and vehicle tax are the main types, and it’s best to know the main details beforehand to avoid any surprises when you’re in country. Let’s talk about personal income tax. Everyone working in Malaysia is required to pay income tax, and all types of incomes are taxable, including gains from business activities and dividends. However, the duration of your stay in Malaysia and the type of work that you do will decipher which tax category you fall in. If you are working in the country for more than 60 days but less than 182 days in one year, you will be considered a “non-resident” and subjected to a flat taxation rate of 28%. As a non-resident, you will also not be eligible for any tax deductions. If you are working in Malaysia for more than 182 days a year, the government considers you to be a “tax resident,” and you will pay progressive tax rates and be eligible for tax deductions. Malaysia’s progressive personal income tax system involves the tax rate increasing as an individual’s income increases, starting at 0% for up to RM5,000 earned, to a maximum of 28% for annual income of over RM1 million. When you come to the end of your employment contract, or if you resign from your job or leave Malaysia for more than three months, you need to apply for tax clearance. This is a certificate or letter from the Malaysian Inland Revenue (LHDN) that determines whether you owe income tax or not. Once this letter has been received, your employer should release the balance of any money owed to you after you settle any outstanding taxes.
Goods and Services Tax (GST) is a tax charged to the consumers that is based on the purchase price of certain goods and services, and it currently stands at 6% in Malaysia. Imported goods and services will also be charged at this rate. Certain goods — such as rice, flour, certain medicines, first 300 units of electricity — are subjected to a tax rate of 0%. The full list of taxable and non-taxable goods and services can be found on the website of the Royal Malaysian Customs Department. GST is said to bring in RM40 billion a year and be keeping Malaysia solvent during recent difficult financial times. In some shops and restaurants, the price you see on the item or the menu will be less than the price you pay at the cashier, so it’s important to prepare for this additional cost when you’re deciding whether you wish to purchase an item or a service.
Besides that, real property gains tax and stamp duty is another type of tax. If you purchase a property in Malaysia, you will be subject to Real Property Gains Tax (RPGT) when you sell it. RPGT is a tax on the profit gained from the sale of a property and is payable to the Inland Revenue Board, and it will vary depending on the amount of time you have owned the property. If you buy a property in Malaysia, you will also need to pay Stamp Duty, which is a tax that is levied on the legal recognition of the S;P Agreement and Loan Agreement when you buy a house. You can calculate the stamp duty that you will owe on a property on the government’s Valuation and Property Services Department website. Road tax and car insurance are compulsory in Malaysia. The road tax structure in Malaysia varies depending on the type of car, its engine capacity, the region and the type of ownership. Cars with less than a 1.6 liter engine capacity get charged a fixed base rate, which varies depending on the type of car and whether it’s a company-registered or private vehicle. While cars that have bigger than a 1.6 liter engine are subject to a progressive rate, as well as a base rate. Basically, the bigger and more expensive your car, the more you can expect to pay in road tax. The Road Transport Department needs to know the type of vehicle, the registration number, the engine capacity, the year of manufacture, and the sum insured to calculate how much you will owe for road tax.
The effects of elasticity on taxation. The most important objective of taxation is to raise required revenues to meet expenditures. Apart from raising revenue, taxes are considered as instruments of control and regulation with the aim of influencing the pattern of consumption, production and distribution. Taxes thus affect an economy in various ways, although the effects of taxes may not necessarily be good. There are same bad effects of taxes too. Effects on the Allocation of Resources: By diverting resources to the desired directions, taxation can influence the volume or the size of production as well as the pattern of production in the economy. It may, in the ultimate analysis, produce some beneficial effects on production. High taxation on harmful drugs and commodities will reduce their consumption. This will discourage production of these commodities and the scarce resources will now be diverted from their production to the other products which are useful for economic growth. Similarly, tax concessions on some products are given in a locality which is considered as backward. Thus, taxation may promote regional balanced development by allocating resources in the backward regions. However, not necessarily such beneficial effect will always be reaped. There are some taxes which may produce some unfavorable effects on production. Taxes imposed on certain useful products may divert resources from one region to another. Such unhealthy diversion may cause reduction of consumption and production of these products. Effects on the Ability to Work Save:
Imposition of taxes results in the reduction of disposable income of the taxpayers. This will reduce their expenditure on necessaries which are required to be consumed for the sake of improving efficiency. As efficiency suffers ability to work declines. This ultimately adversely affects savings and investment. However, this happens in the case of poor persons. Taxation on rich persons has the least effect on the efficiency and ability to work. Not all taxes, however, have adverse effects on the ability to work. There are some harmful goods, such as cigarettes, whose consumption has to be reduced to increase ability to work. That is why high rate of taxes are often imposed on such harmful goods to curb their consumption. But all taxes adversely affect ability to save. Since rich people save more than the poor, progressive rate of taxation reduces savings potentiality. This means low level of investment. Lower rate of investment has a dampening effect on economic growth of a country. Thus, on the whole, taxes have the disincentive effect on the ability to work, save and invest.
The key concept when thinking about how to collect the most revenue is the price elasticity of demand. The price elasticity of demand also plays a key role in determining if a firm can pass the cost of key input price increases to consumers or benefit from reductions in input costs. Economists sometimes refer to this as the “whoever can run from a tax will” principle.
When supply is more elastic than demand, consumers will bear more of the burden of a tax than producers will. For example, if supply is twice as elastic as demand, producers will bear one-third of the tax burden and consumers will bear two-thirds of the tax burden.
When demand is more elastic than supply, producers will bear more of the burden of a tax than consumers will. For example, if demand is twice as elastic as supply, consumers will bear one-third of the tax burden and producers will bear two-thirds of the tax burden.
It’s a common mistake to assume that consumers and producers share the burden of a tax equally, but this is not necessarily the case. Tax incidence is the analysis of the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it. A marginal tax is an increase in a tax on a good that shifts the supply curve to the left, increases the consumer price, and decreases the price for the sellers. In fact, this only occurs when the price elasticity of demand is the same as the price elasticity of supply. That said, it often looks like the tax burden is shared equally because supply and demand curves re so often drawn with equal elasticities! Though not typical, it is possible for consumers of producers to bear the entire burden of a tax. If supply is perfectly elastic or demand is perfectly inelastic, consumers will bear the entire burden of a tax. Conversely, if demand is perfectly elastic or supply is perfectly inelastic, producers will bear the entire burden of a tax.