Tax incidence

From Wikipedia, the free encyclopedia

The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please improve this article or discuss the issue on the talk page.

First discussed by the Physiocrats in France, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare.

Tax incidence also refers to the ultimate payer of a tax. If a government increases tax on petrol, oil companies may absorb it if competition is intense or they may pass it on to private motorists. In the same way, if a tax subsidy is paid to low income earners, the main beneficiary may be their employers, if this allows the employers to reduce the wages they pay if there is competition among low income workers for jobs.

At the aggregate level, tax incidence has been used by political science and sociology to analyze the level of revenue extracted from each income stratum, in order to describe how the tax burden is distributed across social classes. It let to derive some inferences about the progressive nature of the tax system, according to some principle of vertical equity.

[edit] Direct tax payments by income

While incidence is about the ultimate payer of tax, the government reports tax statistics by direct payer only.

In the United States, the Congressional Budget Office produces a number of reports on the share of all federal taxes paid by taxpayers of various income levels. Their data for 2003 shows the following: (Table 1 and Table 2)

The top 1% of households by income had an average taxable income of $1,022,000 with 14.3% of total household income, paid 22.6% of all federal taxes, for an average federal tax rate of 31.4% and average after tax income of $701,500.
The top 5% had an average income of $377,300 with 26.4% of total income, paid 38.7% of all federal taxes, for an average federal tax rate of 28.4% and after tax income of $270,200.
The top 10% had an average income of $260,000 with 37.6% of all income, paid 50.2% of all federal taxes, with an average federal tax rate of 26.8% and after tax income of $190,400.
The top 20% (quintile) had an average income of $184,500 with 52.4% of all income, paid 65.7% of all federal taxes, for an average tax rate of 25.0% and an average after-tax income of $138,500.
The middle 20% had an average income of $51,900 with 14.2% of total income, paid 9.9% of all federal taxes, for an average federal tax rate of 13.6% and an average after-tax income of $44,800.
The bottom 20% had an average income of $14,800 with 4.2% of total income, receive 5.9% from federal income taxes (they get EITC which is a negative tax) and paid 1% of all federal taxes, for an average tax rate of 4.8% and an average after-tax income of $14,100.

Federal taxes overall are highly progressive. In 2005, 5% of the population paid 40% of all income taxes according to the Congressional Budget Office.

State sales taxes, as a flat percentage of spending, tend to take overall a greater percentage of income from low income households than high income households. However this represents a small fraction of the overall federal/state/local tax burden for the average American.