Friday, November 11, 2005

Tax incidence

This is my contribution of the week (tm) to the Wikipedia.

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.

At the aggregate level, tax incidence has been used by political science and sociology to analyze the level of revenue extracted from each income stratum, in order to describe how is the tax burden distributed across social classes. It let to derive some inferences about the progressive nature of the tax system, according to some principle of vertical equity.

Who pays the tax burden

In the United States, the Congressional Budget Office produces a number of reports on the share of all federal taxes paid by taxpayers of various income levels. Their data for 2002 shows the following: (Table 2)

   * The top 1% of taxpayers by income pay 33% of all individual income taxes, and 22.7% of all federal taxes.
* The top 5% of taxpayers pay 54.5% of all individual income taxes, and 38.5% of all federal taxes.
* The top 10% of taxpayers pay 67.4% of all individual income taxes, and 50% of all federal taxes.
* The top quintile pays 82.5% of all individual income taxes, and 65.3% of all federal taxes.

Their numbers also show, that when broken down by quintile, the social insurance taxes are regressive on an effective tax rate basis only for the highest quintile, though that quintile pays the largest share of social insurance taxes (44%). (Table 1)


  • Pechman, Joseph A Who Paid the Taxes, 1966-85? (Washington, D.C., 1985) ISBN 0815769989.


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