tax incidence

Syllable breakdown

Dictionary meaning

the analysis of who ultimately bears the economic burden of a tax, which may differ substantially from the party legally obliged to pay it; the economic incidence of a tax is determined by the relative price elasticities of supply and demand — whoever faces a less elastic response bears more of the burden; for example, a payroll tax nominally split between employer and employee may fall primarily on employees if labour supply is inelastic; a tax on a good with inelastic demand will largely be passed forward to consumers; corporate income tax incidence is contested between shareholders, workers, and consumers; understanding tax incidence is essential for evaluating the distributional consequences of tax policy and for designing tax systems that achieve equity objectives