8.3 Tax Incidence

Tax incidence refers to the person or entity that ultimately pays the tax. This can differ from who is legally responsible for submitting the tax to the government. For example, a property tax on rental properties may be legally paid by the landlord but the economic burden falls on tenants through higher rent. Similarly, payroll taxes might be paid by the employer, but the burden could shift to employees through lower wages. The legal or statutory incidence refers to the party that is legally obligated to remit the tax. For example, employers are responsible for remitting payroll taxes, while property owners are required to pay property taxes. Economic incidence is the actual distribution of the tax burden, which may not align with the legal incidence. It refers to who ultimately bears the economic burden of the tax after market adjustments, such as price changes. For a consumption tax, the distribution of the tax burden depends on the relative elasticity of supply and demand. If the demand is more inelastic than supply, consumers will bear more of the tax burden. Conversely, if supply is more inelastic than demand, producers will bear a greater share of the burden.