TAX INCIDENCE AND TAX EAULITY

Tax incidence-the study of who bears the burden of taxes-is central to  valuating tax equity. As we first saw in Chapter 6, the person who bears the burden of a tax is not always the person who gets the tax bill from the government. Because taxes alter supply and demand, they alter equilibrium prices. As a result, they affect people beyond those who, according to statute, actually pay the tax.

For example, a person not trained in economics might argue that a tax on expensive fur coats is vertically equitable because most buyers of furs are wealthy. Yet if these buyers can easily substitute other luxuries for furs, then a tax on furs might only reduce the sale of furs. In the end, the burden of the tax will ‘fall more on those who make and sell furs than on those who buy them. Because most workers who make’ furs are not wealthy equity of a fur tax could be quite different from what the flypaper theory indicates.