Tax Incidence Concepts

Study Notes

Tax Incidence Overview

Incidence determines who absorbs the tax burden, with statutory incidence being the legal taxpayer and economic incidence describing the ultimate burden after market adjustments.

Tax Shifting Explained

Tax burden can shift from legal to economic payers following market adjustments.
Forward shifting occurs when firms raise prices to pass costs onto consumers.
Backward shifting involves passing costs onto less mobile factors like land and labor.

Components of Incidence

Incidence sources include variations in labor, capital, and land prices.
Use cases reflect changes to consumer goods prices.
Model flexibility allows consideration of individuals as both laborers and capital owners.

Capital Ownership Concentration

Ownership of capital is highly unequal, with the top 1% controlling 54% ($19.2 trillion) and the bottom 50% holding only 0.6% ($0.021 trillion).

Time Frame in Tax Incidence

Short run considers fixed factors, intermediate run treats total capital and labor as static yet mobile, while the long run remains adaptable to shifts in saving and labor supply.

Measurement of Incidence

Typically assessed on an annual basis, recent methodologies account for lifetime incidence in relation to overall lifetime income.

Studies on Revenue Disposition

Differential incidence focuses on varying tax impacts, typically with a fixed government expenditure context.
Balanced Budget Incidence studies the effects of tax increases that fund expanded government services.

Market Adjustment Study Types

Partial Equilibrium evaluates a single market's effects, assuming minimal influence from other markets.
General Equilibrium analyzes all market interactions, providing a comprehensive view of impacts.

Advantages of General Equilibrium

Incorporates complex, explicit interactions between markets.
Unveils unexpected consequences in tax incidence analysis.

General Equilibrium Approaches

Analytical Approach is precise for small tax changes, using limited market models for simplicity.
Numerical Approach addresses multiple effects but may struggle with interpretability, referred to as the "black box problem."

Partial Equilibrium and Excise Tax

In competitive markets, the party with more inelastic demand or supply carries a greater tax burden.
A flatter supply curve combined with a steeper demand curve shifts more burden to consumers.

Description

Explore the fundamental concepts of tax incidence through flashcards. Learn the distinction between statutory and economic incidence, as well as the mechanisms of tax shifting. This quiz will deepen your understanding of how tax burdens are allocated in an economy.