Tax Incidence

. Two Alternative General Equilibrium Approaches:

Analytical Approach: Limited markets for tractability, strictly accurate for small tax changes. Numerical Approach: Analyzes various effects, may face the "black box problem" in understanding changes.

Capital Ownership Distribution:

Capital ownership highly concentrated. Top 1% owns 54% ($19.2 trillion), while bottom 50% owns 0.6% ($0.021 trillion).

Types of Studies - Disposition of Revenues:

Differential incidence: Examines differential tax incidence, often involving tax substitution with fixed government spending. Balanced Budget Incidence: Examines tax increase financing an increase in government services.

Partial Equilibrium: Excise Tax:

In a competitive market, the agent with a more inelastic demand or supply bears the greater burden. A flatter supply and steeper demand shift more burden to consumers.

Incidence Definition:

Incidence refers to who bears the burden of a tax. Statutory incidence is who legally pays the tax, while economic incidence is who effectively bears the tax after market adjustments.

Advantages of General Equilibrium:

More complex analysis. Models all market interactions explicitly. Key role in tax incidence analysis, uncovering unexpected effects.

. Types of Studies - Extent of Market Adjustments:

Partial Equilibrium: Examines effects in one market, assuming effects in others are small. General Equilibrium: Considers effects in all markets, models all interactions explicitly.

Issues of Time Frame:

Short run: Fixed factors. Intermediate run: total capital, labor fixed but mobile across business sectors Long run: Variable capital and labor, subject to changes in saving, international flows, and labor supply.

Incidence Components:

Sources: Changes in prices of labor, capital, and land. Uses: Changes in prices of final consumer goods. Model flexibility for allocating tax burden, considering individuals as both laborers and capital owners.

Tax Shifting:

The shifting of tax burden from legal taxpayers to economic payers after market adjustment. Forward shifting: Firms pass taxes to consumers through higher prices. Backward shifting: Firms pass taxes to relatively immobile factors like land and labor.

Incidence Measurement Time Frame:

Typically measured annually. Recent approaches consider lifetime incidence relative to lifetime income.