Economics

Incidence of a tax connotes the ultimate economic effect of a tax on the real incomes of producers and consumers (Nordhaus, 2007, P. 76). The exact incidence of a tax depends on the price elasticity of supply and demand of the product (Nordhaus, 2007, P. 76). The product in consideration in the two chosen articles is cosmetic procedures such as Botox injections and tanning services. The tax falls under the category of luxury tax on cosmetic procedures (South-Western, 2005). Many states have in the past considered and successfully imposed taxes on cosmetic surgery producers. New Jersey was the first to pass a law in 2004 imposing a 6 percent tax on numerous cosmetic procedures, followed by Texas, Illinois, Washington, Arkansas, Tennessee, and New York, passing similar laws (South-Western, 2005). The issue of taxing cosmetic procedures was back in the news in December 2009, with talks of a Bo-tax to be levied on Botox procedures, which were shortly substituted by the Senate imposing a 5 percent tax on elective cosmetic procedures, with one on indoor tanning services, in the proposed health care bill (Louis, 2009, p. E3).

Effect of Tax on Producers
     The tax is levied on producers. The demand for cosmetic procedures such as Botox injections and tanning services is price elastic in nature. As a result, majority of the tax incidence must be borne by producers. In response to the latest tax on elective cosmetic procedures, Dan Humiston, the President of Indoor tanning Association holds the view that salons will absorb the tax themselves rather than burden consumers (Louis, 2009, p. E3). Roel Kunst, the director of operations at Portofino Sun Tanning, which has six salons in Manhattan, also opined that passing on a 10 percent tax on consumers in economically turbulent times is not a feasible option (Louis, 2009, p. E3).

Effect of Tax on Demand and Supply
     The tax is expected to lower supply and demand for cosmetic procedures, assuming market and economic conditions remain unchanged in the future. With producers having to bear the maximum brunt of the tax despite issuing significant discounts to customers (Louis, 2009, p. E3) in recession, the supply of cosmetic procedures is likely to fall. Similarly, assuming that some incidence of the tax must be borne by consumers, demand for cosmetic procedures is likely to fall as a consequence of the tax. This hypothesis is backed by historic observations about similar taxes. For instance, after New Jerseys imposition of a 6 percent tax on cosmetic procedures in 2004, the difference between expected revenue from these procedures in the following year and the actual revenue for these procedures was over 17 million dollars, implying significant reduction in demand for these goods (South-Western, 2005). According to Dr. James Spencer, a dermatologist in St. Petersburg, Fla, the social effect of the tax is to discourage people from using cosmetic procedures including tanning services, linked to health vices such as skin cancer (Louis, 2009, p. E3). In a nutshell, the tax on cosmetic procedures will lower demand and supply for the same in the short run, market conditions remaining unchanged.

Effect of Tax on Equilibrium Price and Quantity
     Assuming that the tax is borne to some extent by both producers and consumers, as is usually the case, the equilibrium price of cosmetic procedures will rise while its quantity falls. The same has been shown in the following figure

Effect of Tax on Equilibrium Price and Quantity of Cosmetic Procedures
     Original equilibrium was attained at point E. The imposition of the tax shifts the original supply curve AB upwards by the amount of the tax. Given that demand is more elastic than supply, incidence of the tax will mostly be borne by producers with consumers experiencing only a slight increase in equilibrium price. This increase in equilibrium price will lower the equilibrium quantity demanded on imposition of tax.

Hypothetical Situation Involving Imposition of a Price Ceiling
     The setting of maximum prices will either have no effect on equilibrium price and quantity (when maximum price is set above the equilibrium) or it will cause a shortage of the commodity reducing price and quantity actually bought and sold below their equilibrium values (Nordhaus, 2007, p. 77). This situation is illustrated in the following graph

Effect of Ceiling on Equilibrium Price and Quantity of Cosmetic Procedures

of maximum prices have been shown in the graph. In case the maximum price is set at C above the equilibrium price Pe, the market equilibrium for cosmetic procedures will remain unaffected and equilibrium quantity will remain at Qe with equilibrium price staying unaltered at Pe, assuming constancy of remaining factors such as income changes and increased awareness about the considered procedures. 

     Now consider the case where maximum price for procedures is set at C. This price is less than the equilibrium price and will offset the market equilibrium achieved through forces of demand and supply. The equilibrium price Pe is no longer legally attainable. Prices will be reduced from Pe to C, as a result of which quantity demanded will increase from Qe to Q2 while quantity supplied falls from Qe to Q1. Thus, there will result an excess of demand over supply (Q2-Q1) and some method of allocation of available cosmetic procedures will have to be devised to allocate the scarce product among consumers.

     In totality, a price ceiling above equilibrium price will have no effect on the market while a ceiling price set below the equilibrium price will create a scarcity of cosmetic procedures in the market and the need for devising a method of allocation of scarce procedures among consumers will ensue.