The sales tax on the consumer shifts the demand curve to the left, symbolizing a reduction in demand for the product because of the higher price. While demand for the product has not changed (all of the determinants of demand are the same), consumers are required to pay a higher price, which is why we see the new equilibrium point occurring at a higher price and lower quantity. The magnitude of the shift in the demand curve will be equal to the amount of the tax. This makes sense, because the change in demand is going to be equal to the change in price that is caused by the tax.
|Taxes on supply and demand|
The VAT on the suppliers will shift the supply curve to the left, symbolizing a reduction in supply (similar to firms facing higher input costs). While supply for the product has not changed (all of the determinants of supply are the same), producers incur higher cost, which is why we will see a new equilibrium point further up the demand curve at a higher price and lower quantity. Once again, the magnitude of the shift in the supply curve will be equal to the amount of the tax introduced by the government. Essentially, the firms are passing on the tax to the consumers in the same way they would pass on higher input costs.
Another type of tax is a labor tax. This increases the price of labor to firms (because they have to pay the wage AND the tax) which will decrease employment and wages.