Fiscal incidence
From Wikipedia, the free encyclopedia
Fiscal incidence is a concept within public finance, a sub-disipline within economics, that refers to the combined overall economic impact of both government taxation and expenditures on the real economic income of individuals. While taxation reduces the economic well-being of individuals, government expenditures raise their economic well-being. Fiscal incidence is the term for the overall impact of government taxing and spending considered together.
Contents |
[edit] Theory
In theory, governments withdraw resources from society in the form of taxation, and contribute resources back into society in the form of expenditures. However, the burdens of taxation are not borne equally by individuals, and the benefits of government expenditures are not distributed equally throughout society. As a result, the distribution of tax burdens and government expenditure benefits is an important economic question to those concerned with the equity of the fiscal system. When the economic incidence of taxation is combined with the economic incidence of government expenditures, the result is a measure of the overall increase or decrease in welfare that individuals enjoy from the state's taxing and spending policies. This is refered to as fiscal incidence.
[edit] Empirical studies
Early empirical studies of fiscal incidence date to the 1950s. Early results for the United States demonstrated that overall tax policy was mildly progressive — that is, when regressive state-local tax systems are combined with progressive federal taxes, the result is mildly progressive overall. On the spending side, early results illustrated that the distribution of expenditure benefits as a percentage of income was progressive as well, but much more so than the overall tax system. As a result, early studies found that overall fiscal incidence resulted in a net redistribution of income between income groups within the United States, from higher-income individuals to lower-income individuals. Here the term "progressive" refers to benefits accruing to lower-income individuals as opposed to those with higher incomes; "regressive" conversely refers to benefits accruing to higher-income individuals as opposed to those with lower incomes. The neutrality of these terms has been debated, but they are widely used in economic literature.
The field of empirical measurement of fiscal incidence grew throughout the 1960s. It was pioneered by a 1965 study by Irwin Gillespie (1965), "Effect of Public Expenditures on the Distribution of Income", and included an analysis from Tax Foundation researcher George A. Bishop in 1967, "Tax Burdens and Benefits of Government Expenditures By Income Class, 1961 and 1965". Both studies found that the U.S. tax system was roughly proportional overall and mildly progressive over some ranges, while the distribution of expenditure benefits was sharply progressive, resulting a progressive overall distribution of fiscal incidence for 1961 and 1965.
The results of Bishop's 1967 study were replicated subsequently by several academics, such as Morgan Reynolds and Eugene Smolensky. Bishop's results were also utilized as the source data in a study in the political science literature, The Politics of Redistribution (1970) by Brian R. Fry and Richard F. Winters. The Bishop results were also widely discussed in the economic literature, including a 1970 commentary by H. Aaron and M. McGuire in Econometrica, "'Public Goods and Income Distribution".
In some countries, official government agencies periodically produce studies of fiscal incidence to assist lawmakers in the design of tax and spending policies. For example, the Australian Bureau of Statistics periodically produces empicial estimates of the net fiscal incidence of Australia's overall government operations.
