What does the legal incidence of a tax refer to?

The legal incidence of a tax refers to who is statutorily responsible for paying the tax. This means it identifies the party designated by law to bear the financial burden of the tax, regardless of whether that party ultimately pays it or passes the cost onto someone else.

Understanding this concept is crucial because it differentiates between the legal obligations under tax law and the economic realities of who ultimately feels the impact of the tax, which may not always align. For example, even if a sales tax is legally charged to the retailer, the economic burden can shift to consumers in the form of higher prices. Thus, recognizing the legal incidence helps clarify the distinctions between statutory obligations and actual tax burdens.