In the context of tax, what does economic incidence refer to?

Economic incidence refers to who ultimately bears the actual burden of a tax, regardless of who is legally responsible for paying it. This concept is important in taxation because it highlights the difference between the statutory incidence (the party responsible for remitting the tax to the government) and the economic incidence (the individual or entity that ultimately feels the financial impact of the tax).

For example, if a government imposes a tax on a product, the seller might initially pay that tax. However, the seller may pass on part or all of the tax burden to consumers in the form of higher prices. Therefore, even though the seller is legally responsible for paying the tax, the economic incidence can fall on consumers, demonstrating how tax burdens can shift in the economy.

This understanding of economic incidence is crucial for policymakers and economists when evaluating the impacts of taxation on different stakeholders and when developing tax policy that aims to ensure fairness and efficiency in economic interactions.