Put a tax on a market and see who really pays it — buyers or sellers — how much value it destroys, and why raising the rate can't raise revenue forever.
See that the side a tax is placed on doesn't decide who bears it — elasticity does — and that raising the rate eventually lowers revenue.
Start at the default tax with equally steep demand and supply. Notice how the burden splits between the buyer price and the seller price.
When buyers and sellers are equally responsive, how is the tax shared between them?
Who bears the tax — the wedge, revenue, and deadweight loss
Demand meets supply at the no-tax price. A per-unit tax opens a wedge: buyers pay the higher price, sellers keep the lower one. The shaded rectangle is government revenue; the amber triangle is the deadweight loss — trades the tax destroyed.
The Laffer curve: revenue vs. tax rate
Government revenue as the tax rate sweeps from zero to the choke rate. It climbs, peaks, then falls — past the peak, a higher rate raises less. The dashed line marks your current rate; the green dot marks the revenue-maximizing rate.
Tax incidence is about who really bears the cost of a tax — which can differ completely from who legally hands over the money. The side a tax is placed on (statutory incidence) does not decide who actually pays it (economic incidence). What decides the split is elasticity: how responsive buyers and sellers are to price. The more inelastic side — the one less able to walk away — bears more of the burden, because it changes its behaviour least when the price moves against it. Put a tax on gasoline and drivers, who can't easily cut back, shoulder most of it no matter whether the law taxes the station or the customer. A tax also drives a wedge between what buyers pay and what sellers receive, so some mutually beneficial trades stop happening — that lost value is deadweight loss, a cost on top of the revenue raised. And revenue itself has limits: the Laffer curve notes that beyond some rate, a higher tax shrinks the taxed activity so much that revenue falls rather than rises.
You place a tax on a market and watch the burden split between buyers and sellers shift as you change how elastic each side is — the inelastic side always pays more. You also see the deadweight-loss wedge open up, and push the rate up until revenue peaks and then falls along the Laffer curve.