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Incidence of a Tax

In: Taxation History, Theory, Law and Administration

Author

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  • Parthasarathi Shome

    (London School of Economics
    International Tax Research and Analysis Foundation)

Abstract

A tax may be levied on a firm or individual but its final burden—what economists term ‘incidence’—may be shared by another economic entity. Thus, a tax on the supply of Laptops may be shifted partially to consumers if consumer demand is less than fully elastic if Laptop is a relative necessity, not a luxury. Incidence analysis of a product market alone is referred to as ‘partial incidence’ of a tax. The Laptop supplier may pass on some burden to the labour he hires, in other words, to inputs he uses in production. When all actors in the production process—inputs and output—are considered together, the final distribution of the burden among them is called ‘general incidence’ of a tax. This has been analysed in the context of the corporation income tax. It is a ‘partial’ tax collected from the income of capital in the corporate sector alone. Resource use decreases in the sector and they move out from it. They will be absorbed in the non-corporate sector though the relative returns—wages and rental of capital—to factors will change in the entire economy reflecting various product and factor substitution elasticities. These incidence outcomes are analysed here.

Suggested Citation

  • Parthasarathi Shome, 2021. "Incidence of a Tax," Springer Texts in Business and Economics, in: Taxation History, Theory, Law and Administration, edition 1, chapter 9, pages 81-96, Springer.
  • Handle: RePEc:spr:sptchp:978-3-030-68214-9_9
    DOI: 10.1007/978-3-030-68214-9_9
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