Incidence of Tax

12 Key excerpts on "Incidence of Tax"

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  Public Sector Economics

  • Richard W Tresch(Author)
  • 2021(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  It also happens to contain many different approaches to measuring inci-dence, both empirical and theoretical, and this is bound to be confusing at first pass. The study of tax incidence is ultimately an empirical exercise. Its goal is to determine the burden of the various taxes that governments use so that public officials can make reasoned equity judgments about them. Does a particular tax help or hinder society’s quest for distributive justice? The answer to this question requires knowing the incidence of the tax. Yet there are sharp disagreements in the professional economics literature on the P U B L I C S E C T O R E C O N O M I C S 344 incidence of some of the major taxes. One of the more famous examples relates to corpo-ration income tax. Two of the leading public sector economists in the last half of the 20th century, Richard Musgrave and Arnold Harberger, conducted independent studies of the incidence of U.S. corporation income tax (Krzyzaniak and Musgrave, 1963; Harberger, 1962). Musgrave concluded that the tax was passed on more than 100% to consumers, whereas Harberger concluded that the burden of the tax fell almost entirely on corporate stockholders. There are sharp differences of opinion as well among respected economists on the incidence of sales taxes, Social Security payroll tax, and property tax. The differences in the empirical literature arise in part because the theory of tax incidence is far from settled. Economists have proposed different measures of tax inci-dence that are not necessarily consistent with one another. They also disagree on the appropriate design of a tax incidence analysis, including such issues as whether the inci-dence of a tax can be considered independently from the rest of a government’s budget and whether incidence should be measured on an annual or a lifetime basis. Different choices can lead to quite different conclusions about the incidence of particular taxes.

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  Modern Public Economics

  • Raghbendra Jha(Author)
  • 2009(Publication Date)
  • Routledge

    (Publisher)

  11 The theory of tax incidence DOI: 10.4324/9780203870044-11

  Key concepts: tax incidence in partial and general equilibrium; output and factor substitution effects; fair wages; rate of return regulation.

  11.1 Introduction

  Tax incidence measures the sharing of the tax burden between different groups. When a sales tax is imposed on a commodity, part of the tax may be passed on to consumers so that the burden of the tax is shared by consumers and producers. In this case we say that the incidence of the tax is on producers as well as consumers. If the tax cannot be passed on to consumers then the incidence of the tax would be on producers alone. If a wage tax is imposed and the supply of labor falls, the market clearing wage rate would rise and this would increase the cost of labor to producers. The impact of the wage tax and, hence, the incidence of the wage tax would be on workers as well as employers.

  The above two examples illustrate the important point that the measurement of tax incidence is model specific. In the first model, we are essentially carrying out a partial equilibrium exercise as depicted in Figure 11.1 . A specific tax is imposed on commodity x. The producer price of the commodity is q and the consumer price is p where

  Figure 11.1

  Commodity tax incidence in partial equilibrium

  11.1

  p = q + t

  where t is the rate of the specific tax. This is the vertical distance between the pre- and post-tax supply curves in Figure 11.1 . The consumer price rises from p0 (q0 ) to p1 . The producer price is ql and we have

  11.2

  p 1 = q 1 + t .

  As shown in Figure 11.1 , part of the tax burden is borne by the producer and part by the consumer. A moment’s thought would tell us that the proportions in which the tax burden is split up between producers and consumers would depend on the elasticities of supply and demand.

  In the second example, however, we are admitting general equilibrium

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  The Economic Theory of Fiscal Policy

  • Bent Hansen(Author)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  41. 9 M. Kalecki, ‘A Theory of Commodity, Income and Capital Taxation’, Economic Journal, London 1937. C. Welinder, ‘Grundzüge einer dynamischen Incidenztheorie’ (The Basis of a Dynamic Incidence Theory), Weltwirtschaftliches Archiv 1940. See also the discussion on the effects of a ‘sales tax’ in the Journal of Political Economy. 2 The Concept of Incidence Within the neo-classical theory of public finance we find a distinction between the Incidence of Taxes and the effects of taxes. The terminology is not very fortunate, and with many writers it is not at all clear what meaning is to be attributed to the concept of the Incidence of Taxes in contradistinction to their effects. The most reasonable interpretation, and that which accords best with neo-classical intentions, is that the expression ‘tax incidence’ refers to the influence of the tax upon the real net incomes of the various individuals, or groups of individuals, or factors while the expression ‘effects’ refers to all other effects of the tax. Incidence thus becomes one particular effect among all the other effects of a tax. Having defined the concept of tax incidence in this way, there is obviously no reason to speak of incidence only in connection with taxes and other State incomes. We could just as well speak about incidence in connection with the State expenditure; we could then investigate how the actual incomes of various individuals (or groups of individuals, or factors) are influenced by measures taken on the expenditure side of the budget. Instead of speaking of tax incidence therefore, we can speak about incidence in a more general sense meaning the effect of a certain fiscal policy measure, other things being equal, upon the real incomes in society in the long or short run. It will now be evident that the whole problem depends on the requirement that other things be equal

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  Three Essays on Taxation in Simple General Equilibrium Models

  • Neil Bruce(Author)
  • 2022(Publication Date)
  • Routledge

    (Publisher)

  CHAPTER I SOME EXTENSIONS OF THE TWO SECTOR GENERAL EQUILIBRIUM MODEL OF TAX INCIDENCE

  DOI: 10.4324/9781003167624-2

  The analysis of tax incidence is concerned with the redistributive effects of taxation among individuals or groups of individuals in society. The identity of these groups is determined by the nature of the tax and the interests of the researcher, but generally individuals are grouped according to factor ownership, level of income, commodity preference or other such distinction. While the term incidence is often used to refer to the “primary” burden of the tax, this can lead to the erroneous conclusion that the effect of a tax on a particular group’s income lies between 0 and 100 percent of the tax proceeds. In fact, the total distributive consequences of a tax depend on how the tax affects relative prices, particularly factor returns, and the distributive effect on a given group can exceed 100 percent or be less than 0 percent of the tax proceeds, the latter being a case where the group gains as a result of the tax.1

  1 A. C. Harberger deals at some length with the “no-gain fallacy” in “Corporation Income Taxes,” in International Encyclopedia of the Social Sciences (New York: Crowell Collier, 1968), Vol. 15, Part III, pp. 538–45 which is reprinted in Arnold C. Harberger, Taxation and Welfare (Boston: Little, Brown and Co., 1974), pp. 122–33.

  As a result, modern incidence analysis is concerned with the effect of taxes on relative prices and it is assumed that the tax proceeds are redistributed or spent in a way that is neutral with respect to the relevant groups. This approach necessarily involves the general equilibrium determination of relative prices, and the two good, two factor model used extensively by trade theorists has proven useful for this purpose.

  The starting point is the well known analysis of differential tax incidence1

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  Revival: Economic Principles (1904)

  An Introductory Study

  • Flux(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  It is that the tax may be collected from one person and its pressure be really made to rest on another. This has already received some illustration in the discussion of import and export duties (see p. 249, et seq.). In the case of a duty on tea imported into the country, it is somewhat obvious that the importer pays the duty, but that he has no intention of bearing the burden. He expects, and, speaking generally, contrives to pass on the charge to those to whom he sells, who pass it on in turn till the final resting-place of the burden of the tax is on the consumer. Some increase of the burden is, in fact, generally produced in such a course of transference from one to another. None of the dealers who advance, or become responsible for, the duty do so gratuitously, and the charges, made as a recompense for making such advances, are added to the burden which the duty imposes on the consumer. In distinguishing between the original person who pays a tax and those who finally bear the burden, it is convenient to refer to the former by speaking of the impact of the tax, the latter by speaking of its ultimate incidence. The incidence may or may not differ from the impact. Where it does differ the tax is called an indirect one, where it is the same the tax is called direct, as the levy is then made directly from the person who ultimately bears the burden of the tax. The problems connected with the determination of the real incidence of various forms of taxation are among the most difficult problems of economics. We shall only consider some of the most general features of this class of problems. It is useful to examine generally the effect of taxation of the chief forms of income, namely, rent, interest, wages, profits. The mode of levying such taxes is of great importance in determining their results, but we shall, for the purposes of this discussion, assume that the taxes are levied separately and distinctly on these constituents of income

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  Public Finance

  A Normative Theory

  • Richard W. Tresch(Author)
  • 2002(Publication Date)
  • Academic Press

    (Publisher)

  6 M. Feldstein, ``Incidence of a Capital Income Tax,'' Review of Economic Studies , October 1974; A. Auerbach and L. Kotliko V , Eds., Dynamic Fiscal Policy , Cambridge University Press, New York, 1987. 7 J. Shoven, ``The Incidence and E Y ciency E V ects of Taxes on Income from Capital,'' Journal of Political Economy , December 1976. Also, J. Shoven and J. Whalley, ``A General Equilibrium Calculation of the E V ects of Di V erential Taxation of Income from Capital in the U.S.,'' Journal of Public Economics , November 1972; D. Fullerton and D. Rogers, Who Bears the Lifetime Tax Burden? , Brookings Institution, Washington, D.C., 1993. 16. THE THEORY AND MEASUREMENT OF TAX INCIDENCE 529 General Principles of Tax Incidence Despite di V erences in the way they measure tax incidence, nearly all tax theorists agree on two general principles. The W rst is that people ultimately bear the burden of taxation, so that any notion of burden must relate either directly or indirectly to individual utilities. The second is that tax incidence must be analyzed within a general equilibrium framework. That individuals bear the burden of taxation is merely a speci W c applica-tion of the W rst principle in all of normative public sector economics, that the government's task is to promote the interests of its constituents. Thus, although the government may levy a corporation income or sales tax on General Motors GM), the interesting question in tax incidence is not the harm done to General Motors as a legal entity but rather which people bear the burden of the taxÐGM stockholders, GM workers, consumers of GM products, other consumers, other stockholders, other workers, and so forthÐand how much of a burden each of them su V ers. This principle also implies that any measure of burden should incorporate each individual's own perception of the burden he or she su V ers as a result of the tax.

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  Handbook of Public Sector Economics

  • Donijo Robbins(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  The choice of the second-best alternative tends to follow two different courses. The first course emerges as a matter of incidence and the answers found when the analysis concerns who bears the burden and who receives the benefit of fiscal policies. A review of the incidence literature follows below. A second course influencing the second-best alternative to a lump sum tax and a neutral fiscal policy comes from the analysis of behavioral reactions to tax policies, primarily those reactions found in work, saving, investment, portfolio choice, risk taking, and innovation and productivity. These behavioral reactions follow the discussion of incidence.

  13.3.1 Incidence

  Discussion of the market reaction to government fiscal policy decisions starts with some brief mention of incidence. Musgrave (1953a, 1953b) gets the greatest credit in focusing attention on “the changes brought about by a given public finance instrument in the distribution of real income available for private use,” a definition Break uses (1974: 123) in recognition of Musgrave’s work. Incidence studies (Mieszkowski, 1969; McIntyre et al., 2002) distinguish between those taxpayers statutorily directed to comply with or be entitled to benefit from the fiscal policy design, nominal incidence, and individuals who ultimately bear the burden or receive the benefit after all shifting of burdens and benefits takes place, economic incidence.

  Incidence models also differ in the way economists choose to study the impact policy instruments have. The static incidence model characterizes much of the theory and empirical research in public finance in contrast to the more realistic dynamic incidence idea. Static incidence refers to the first shift in one tax bill from the check writer to the individual whose purchasing power and income decline as a result. Dynamic incidence refers to the rates of change in taxes and incomes and then the behaviors — saving, investment, consumption, and labor supply for example — that are sensitive to changes in taxes and incomes (Krzyzaniak, 1972; Feldstein, 1974a, 1974b; Break, 1974). With effort, research with a dynamic incidence model can reveal not only current but lifetime income and current and multiperiod effects on the economy, taking into account individual and aggregate reactions.

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  The Rich, The Poor, And The Taxes They Pay

  • Joseph A. Pechman(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Table 2.1 ).

  Third, MERGE files have been developed for the years 1966, 1970 and 1975, and the 1975 file has been projected to 1980 and 1985. Thus the data provide estimates of the changes in the distribution of tax burdens over a period of about two decades.

  Table 2.1 : Tax Incidence Assumptions Used in This Studya

  The income concept used here corresponds closely to an economist’s comprehensive definition of income for family units. In addition to the incomes earned in the market system (wages, interest, dividends, rents, business profits), this concept includes transfer payments and capital gains accrued during the year (whether realised or not).5 To convert income to a before-tax basis, indirect business taxes as well as direct taxes, are included in income.6

  The Incidence of Tax—used synonymously with ‘tax burden’ in this study—is measured by the reduction in real incomes that results from the imposition of that tax. Taxes affect real income in either or both of two ways: they may reduce the incomes of individuals in their role as producers; or they may increase the prices of consumer goods and thus reduce the purchasing power of a given amount of money income. The former effect is the burden of taxation on the ‘sources’ of income; the latter is the burden on the ‘uses’ of income. Both of these effects are measured in this study. However, no attempt is made to measure the burden that results from the reallocation of resources or the changes in consumption patterns that may be caused by taxation because such effects cannot be measured with sufficient accuracy.

  This study is concerned solely with the distribution of tax burdens, without any reference to the distribution of benefits from the governmental activities that are supported by taxes. It attempts to show how the distribution of disposable income in the past two decades differed from what the distribution would have been if all tax revenues had come from a proportional income tax with the same yields.6 This differential incidence approach was adopted because the benefits of many, if not most, government activities cannot be allocated even in principle.7

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  Economic Principles of Commodity Taxation

  • Vidar Christiansen, Stephen Smith(Authors)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  Profits will only rise where the induced price increase outweighs the tax burden. Weyl and Fabinger (2013) presents a very general approach that nests a number of models including perfect competition and a variety of models of symmetric as well as asymmetric imperfect competition. The key unifying concept in their analysis is a so-called conduct parameter which, denoted by θ , is defined in our notation as θ ¼ ½ðq  c  tÞ=qε, the elasticity-adjusted Lerner index in the symmetric case. The analysis shows how the θ set by firms in the various cases as well as the properties of the parameter determine the tax incidence. As is intuitive, the less competitive conduct is (the larger is θ), the more of taxation is borne by firms relative to consumers. The conventional wisdom that the tax incidence is independent of which agents remit the tax is challenged when supply and demand do not only depend on (tax-inclusive and tax-exclusive) prices, but taxes play a separate role, for instance, because taxes are evaded. Kopczuk et al. (2016) show that shifting the tax remittance to the sector with less tax-elastic evasion results in higher pass- through of the tax. Before closing the theoretical discussion of tax incidence, a caveat may be in order. One should bear in mind that the partial market equilibrium analysis commonly used to discuss tax incidence may be too limited because there may be other repercussions, for instance, in terms of lower wages, due to either general equilibrium effects or bargaining. Empirical evidence on the extent to which VAT and other indirect taxes are passed through to consumer prices has been most widely researched at the sub-national level. The differences in the rates of retail sales taxes set by local governments in the United States provide a promising focus for empirical research on incidence.

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  The Distributional Effects of Government Spending and Taxation

  • D. Papadimitriou(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Such incidence assumptions are generally derived from a specific theoretical framework, a combination of theoretical predictions and empirical findings from testing theoretical predictions, or, when theoretical arguments and empirical evidence are inconclusive, just plain arbitrarily. In the second step, taxes and expenditures are distributed across households, grouped into different income groups, in accordance with the incidence assumptions and, when appropriate, other household-level characteristics relevant to the determination of tax liability and expenditure incidence (Musgrave, Case and Leonard, 1974). The second category of studies is based on computable general equilibrium (CGE) models that allow for estimating the effects of all types of taxes and government expenditures simultaneously on factor and product prices (Piggot and Whalley, 1987). A CGE model does not need to make assump- tions regarding the incidence of particular types of taxes because their incid- ence is determined endogenously (Ballard, era/., 1985). Further, being based Overall Assessment of the Distributional Consequences in the US 17 on explicit utility-maximizing behavior of households, such a model can also assess welfare losses from taxes suffered by different types of households and the deadweight loss from taxation. However, regarding public goods, the problem still remains because preferences for public goods have to be necessarily imputed. For example, in the study by Piggot and Whalley cited above (on the Australian tax-benefit system), preferences for public goods were derived by imputing 'private expenditures' on public goods according to two alternative imputation rules: proportional to income and equal dollar amount per household (Piggot and Whalley, 1987, p. 687). Several criticisms have been advanced against both types of studies. A key issue plaguing the first category is the sensitivity of estimates to the incid- ence assumptions.

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  Investment, Employment And Income Distribution

  • A. Asimakopulos(Author)
  • 2020(Publication Date)
  • Taylor & Francis

    (Publisher)

  3 The Short-Period Incidence of Taxation l Co-authored with J. B. Burbidge Recent work on the Incidence of Taxes has been largely carried out on the basis of neoclassical assumptions. 2 The models used are pre-Keynesian; real wage rates are determined in the labour markets, with full employment automatically achieved through price and wage flexibility. Investment is then determined by saving out of full-employment income. 3 It is concluded from these models, when competitive conditions are assumed, that in the short period the economic incidence of general taxes is the same as their legal incidence. We hav~ obtained different results by examining the short-period Incidence of Taxation in a model that uses different assumptions and is based on the work of Kalecki and Keynes. By a short period we mean a period of time within which changes in productive capacity can be neglected. General features of the model Three groups are distinguished in this model of a .closed economy: workers, rentiers and firms. Real incomes for workers and rentiers are measured in terms of the command of their disposable incomes over consumption goods and for firms in terms of the command of their after-tax profits over investment goods. Fixed investment in real terms, in the particular short period examined, is assumed to be given in most of the situations considered. It is determined by decisions taken by firms in earlier time periods and may vary from period to period. Our analysis concentrates on a particular 48 The Short-period Incidence of Taxation short period and the basis for these investment decisions is not considered here.

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  The Distributional Impact of Taxes and Transfers

  Evidence From Eight Developing Countries

  • Gabriela Inchauste, Nora Lustig(Authors)
  • 2017(Publication Date)
  • World Bank

    (Publisher)

  Incidence Results For a tax or expenditure to have large distributional impact, it needs to be large relative to income, but it also needs to be strongly targeted to the rich or the poor. 25 Even though the center of the CEQ analysis is a comparison of the five income concepts presented earlier, it is easier to interpret those results if targeting and incidence are understood. To that end, table 2.7 gives Kakwani coefficients calculated for four income concepts and the marginal contribu-tions to changes in inequality for all of the tax and expenditure items included in the analysis. Table 2.6 Net Impact of Taxes and Social Expenditures in Armenia, by Poverty Group Percentage of market income Income group (y) Change to market income from all taxes Change to market income from all transfers Difference between market income and consumable income a Difference between market income and final income b y < $1.25 −42 250 208 247 $1.25 ≤ y < $2.50 −23 43 20 32 $2.50 ≤ y < $4.00 −26 21 −4 2 $4.00 ≤ y < $10.00 −27 9 −18 –15 $10.00 ≤ y −28 4 −24 −23 Source: Based on 2011 Integrated Living Conditions Survey (ILCS) database, National Statistical Service of the Republic of Armenia, http://www .armstat.am/en/?nid=246. Note: Income groups stated in terms of U.S. dollars per capita per day at purchasing power parity (PPP). “Market income” comprises pretax wages, salaries, income earned from capital assets (rent, interest, or dividends), and private transfers. a. Consumable income subtracts from market income tax payments, social security contributions, and indirect taxes (such as value added tax) and adds direct cash transfers. b. Final income adds to consumable income the effects of in-kind benefits such as health and education.

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