Tax Incidence

The process of analyzing the effect that a particular tax has on the distribution of economic well-being is known as Tax Incidence. Tax Incidence refers to every tax burden and is fully responsible for every encumbrance levied upon by the tax system and it evaluates the entire process of tax burden.

A fair tax system is essential and critical in a country such as India. The Tax Incidence System usually determines the consequence led by different tax alternatives and the recent tax system. The process of Tax Incidence divides the population into 5 basic groups corresponding to their income range. For example, the group is measured from 20 percent of the lowest income population to 20 percent of the highest income population. Each of these groups is called an 'income quintile'. Each of these groups includes both single and married tax-payers.

In USA for instance, the Tax Incidence analysis proved that the lowest income population in Massachusetts in 2002 includes the group of people that have earned below USD 17,000, the average income during this year being USD 10,000, and the highest income surpassed the sum of USD 367,000 in 2002. The Tax Incidence System also measures the effect of tax alternatives on different income groups. To be precise, Tax Incidence determines the attitude of the people belonging to different income group after a tax change is being implemented. This action of the Tax Incidence Theory determines the capacity of each of the income groups which can pay its taxes perfectly.

The Tax Incidence System is classified under 2 broad categories. They are: Initial Incidence and Final Incidence. Initial Incidence deals with the legal tax payment to the government and those who are abiding by the law. The Final Incidence focuses upon those on whom the tax burden has been imposed. A regular presentation of the statistics of tax changes and its impact on various income groups helps the law-makers understand the responses coming from people regarding complex tax changes.

The concept of Tax Incidence does not depend on the government's revenue. It depends on two factors, namely, price elasticity of demand and price elasticity of supply. For example, the tax levied upon the labor class is usually carried out by the owner of the organization or the consumers of the products. The Tax Incidence System has also enlisted a scheme of the distribution of the tax burden between the owner and the worker. It is largely practiced in United States which claims the payment of taxes to be equally divided between the employee and the employer.

Last Updated on 14^th June 2011

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