Tax incidence

Tax incidence is the distribution of a tax’s economic burden among buyers, sellers, workers, or owners of capital. It depends on how markets adjust, not simply on who legally pays the tax.

Tax wedge: The gap between the price buyers pay and the price sellers receive when a tax is imposed. It shows how a tax divides the market price between buyers and sellers.
Payroll tax: A tax on wages or employment, commonly divided by law between employers and employees. Its economic burden can fall differently from its legal split between payroll parties.
Supply and demand: A model of how buyers’ demand and sellers’ supply determine market prices and quantities. Market responses to a tax shift equilibrium prices and divide its burden.
Tax capitalization: The incorporation of expected future taxes into the current value of an asset. It explains how recurring taxes can burden owners through lower asset prices.
Price elasticity of demand: A measure of how much quantity demanded changes when price changes. Less elastic demand generally leaves buyers bearing more of a tax.
Value-added tax: A consumption tax collected in stages on the value added to goods and services. Its incidence depends on how consumer prices and producer returns respond.
Consumer surplus: The difference between what consumers are willing to pay and what they actually pay. Its reduction measures part of the burden falling on buyers.
Tax incidence in partial equilibrium: The distribution of a tax’s burden within a single market, holding other markets fixed. This is the narrow benchmark against which broader incidence estimates are compared.
Price elasticity of supply: A measure of how much quantity supplied changes when price changes. Less elastic supply generally leaves sellers bearing more of a tax.
Corporate tax incidence: The distribution of corporate income tax costs among shareholders, workers, and consumers. It extends incidence analysis to firms and the people connected to them.

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