The true measure of the burden of a tax is the change in peoplersquo;s economic situations as a result of the tax. The changes should be measured as the effects on everyonersquo;s net-of-tax income after all economic adjustments have run their courses. The burden measure should include not only changes in peoplersquo;s after-tax incomes in a single year, but the lifetime consequences of the tax change as well. Unfortunately, policymakers are not presented with this type of comprehensive information on the true burden of taxation and must make policy judgments based on incomplete and misleading statistics.
One cannot tell the true burden of a tax just by looking at where or on whom it is initially imposed, or at what it is called.
What price do we pay for glossing over the true economic burden of a tax? Failure to understand and take account of the economic consequences of taxation leads to a gross misrepresentation of the distribution of the tax burden.This in turn has led to a tax system that, while supposedly promoting social justice, is actually harmful to lower-income workers and savers, as well as damaging to the population as a whole.
Some Terminology:
(1) The "statutory" or "legal obligation," which refers to the person on whom the law says that the tax obligation falls (which may bear little relationship to who actually feels the pain).
(2) The "initial economic incidence" (or "incidence" for short), which is how the economic supply and demand conditions in the market for the taxed product or service or factor of production allocate the tax among suppliers and consumers of the taxed item (which allocation may be different in the short run and the long run);
(3) The "ultimate economic burden" (or "burden" for short), which measures the changes in peoplersquo;s after-tax incomes after all the economic adjustments to the tax have occurred across all affected markets as consumption behavior, resource use, and incomes shift to their new patterns.
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