Tax Incidence

Discipline: Economics

First discussed by the Physiocrats in France, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare.

Tax incidence also refers to the ultimate payer of a tax. If a government increases tax on petrol, oil companies may absorb it if competition is intense or they may pass it on to private motorists.

Similarly, a taxi driver may pass on the tax increase to his passenger and a food distributor may pass it on to a supermarket, which in turn passes it on to its customer.

Also see: ability to pay principle, equal sacrifice theory

Source:
J A Pechman, Who Paid the Taxes, 1966-85? (Washington, D.C., 1985)

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