What is the difference between impact of tax and incidence of tax?


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Connor Sephton answered
In order to understand the difference between the impact and the incidence of tax, you need to have a strong understand of what each of these phrases means individually. The impact of tax refers to the way the introduction of taxation, or the raising of tax levels, on a particular product or service, affects the way the product or service is used. The introduction or increase of tax, for example, usually results in the product or service being purchased less often. As a result, the impact of tax, or tax impact, is usually negative for the development of an economy, as it hinders and reduces spending, which is necessary for the growth of an economy.

On the other hand, the incidence of tax refers to the people who carry the burden, for want of a better word, of tax. For example, if you own a large portion of land, but your neighbor owns a small portion of land, and tax on land goes up, you would be said to be part of the population subject to the incidence of tax. An example of the incidence of tax in practice is in the United States Social Security Payroll Taxes. These taxes are shared equally between the employer and the employee - however, many economists feel that the employee bears a higher incidence of tax, as employers will usually lower wages if taxes are increased. This would mean that, not only will the employee have to pay half of this tax, but their wages will also be reduced.

Therefore, a simple way of describing the difference between the impact and the incidence of tax would appear as follows: The incidence of tax relates to the effects upon the people who pay the taxes, while the impact of tax relates to the effects upon the goods and services which are taxed. It could be argued that the two are linked, as if taxes on goods and services are raised, the impact of tax would mean that less people pay for them - as a result, the government and other large bodies have to find a source of income other than VAT, and therefore other taxes may be raised, effecting the incidence of tax.

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