calculation for tax incidence

Introduction

Tax incidence refers to the analysis of the effect of a particular tax on the distribution of economic welfare. It examines who ultimately bears the burden of a tax, whether it be consumers, workers, or other factors of production. This synthesis explores various methodologies and findings from multiple research papers on tax incidence, focusing on both short-term and long-term perspectives, as well as different models and approaches used in the analysis.

Key Insights

Lifetime vs. Annual Tax Incidence:
- Lifetime tax incidence calculations show that while income tax is less progressive over a lifetime compared to annual calculations, other taxes tend to be less regressive. Lifetime calculations are also more robust to alternative shifting assumptions .
Local Level Tax Incidence:
- The computation of Lindahl taxes, which are sensitive to individual utility functions, can be operationalized using individual demand curves for public goods. This approach allows for the study of tax incidence on groups defined by socio-demographic characteristics other than income, but is mainly useful at the local level.
Hierarchical Models:
- General equilibrium models with hierarchical production structures show that the incidence of factor and commodity taxes can differ significantly from traditional models, even under strict parameter restrictions.
Long-Run vs. Short-Run Incidence:
- Long-run tax incidence can differ substantially from short-run incidence. Factors determining short-run incidence may be irrelevant in the long run, and the elasticity of labor supply becomes crucial when labor supply responses vary over the life cycle.
Indirect Taxes and Consumption:
- Allocating indirect output taxes, such as general sales taxes, to consumption can lead to errors and inconsistencies. Instead, these taxes should be allocated to factor earnings to avoid methodological issues.
Measurement and Methodological Differences:
- There are significant methodological differences in measuring tax incidence, including incidence as impact, changes in relative prices, and changes in welfare. These differences lead to varying interpretations and results in empirical studies .
Disequilibrium Models:
- In disequilibrium models, tax incidence is measured by the labor-capital ratio rather than the wage-rental ratio. These models show that the burden of a partial factor tax falls more heavily on the taxed factor.
Factor Tax Burden Sharing:
- Traditional models suggest that the burden of a factor tax is shared among other factors of production. However, under certain conditions, labor can bear more or less than 100% of the tax burden, depending on the model used.

Conclusion

The analysis of tax incidence reveals that the burden of taxes can vary significantly depending on the model and methodology used. Lifetime tax incidence provides a more robust and less regressive view compared to annual calculations. Local level studies and hierarchical models offer unique insights into the distributional impacts of taxes. Long-run and short-run incidences can differ markedly, highlighting the importance of considering the elasticity of labor supply and other dynamic factors. Methodological differences in measuring tax incidence can lead to varying results, emphasizing the need for careful consideration of the chosen approach. Overall, understanding tax incidence requires a comprehensive analysis of various models and their implications on different economic agents.

Calculation for tax incidence

Summary

Introduction

Key Insights

Conclusion

Sources and full results

Some Calculations of Lifetime Tax Incidence

Lifetime tax incidence calculations show mild progression in tax rates across household deciles, with income tax being less progressive but other taxes being less regressive, and are more robust to alternative shifting assumptions than annual calculations.

FISCAL INCIDENCE AT THE LOCAL LEVEL

This paper proposes an alternative computational approach to Aaron and McGuire's, using individual demand curves for public goods and the median voter model, to measure fiscal incidence at the local level.

Tax incidence in a hierarchical model

A hierarchical model with two mobile factors and flexible production coefficients significantly alters tax incidence results for factor and commodity taxes compared to traditional models.

Tax Incidence in a Life Cycle Model with Variable Labor Supply

The elasticity of labor supply is an important determinant of long-run tax incidence in a life cycle model with variable labor supply, if factor taxation affects labor supply differentially over the life cycle.

TAX INCIDENCE, INDIRECT TAXES, AND TRANSFERS

Allocating indirect output taxes to factor earnings in tax incidence analysis avoids methodological and logical inconsistencies, while still allowing for accurate tax incidence analysis.

The Theory and Measurement of Tax Incidence

Tax incidence is the central concept in both normative and positive distributional theories of taxation, and its measurement is influenced by methodological differences among experts.

Chapter 26 Tax incidence

Tax incidence studies determine how the burden of a tax is allocated among consumers, workers, and other factors of production, using various methods and models.

A general disequilibrium model of tax incidence

A general disequilibrium approach to tax incidence reveals that tax incidence varies more on the taxed factor than the untaxed one in an economy experiencing excess demand and supply.

Saving and Tax Incidence Revisited

This paper presents a less restrictive and more plausible model for tax incidence, allowing labor to bear more or less than 100% of the tax burden under various conditions.

Tax Incidence

Tax incidence studies determine how the burden of a tax is allocated among consumers, workers, and other factors of production, and can be used to inform policy decisions.

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