Tax incidence


Free access to the

FT-access-to-schools-logo(11)Sixth formers and their teachersnow get free access to the

To gain free access register your interest here.

Read more
Model agencies collude to fix rates

Regulators find leading model agencies guilty of price fixing.

Read more
Alternative finance

Report on the growth of alternative finance.

Read more

Tax incidence

The relative burden, or incidence, of an indirect tax is determined by the price elasticity of demand (PED) of the consumer in response to a price rise. If the consumer is unresponsive, and PED is inelastic, the burden will fall mainly on the consumer. However, if the consumer is responsive to the price rise, and PED is elastic, the burden will fall mainly on the firm.

Tax burden on the consumer

When demand is inelastic the tax burden is mainly on the consumer.

Tax burden on producer

When demand is elastic, the tax burden is mainly on the producer.

Tax burden evenly split

In this case, the tax burden is split evenly between the consumer and producer.

Example - the incidence of a tax on cigarettes

If a government puts a £1 tax on each packet of cigarettes, the legal incidence is on the cigarette smoker. However, the local market may have many sellers, and be highly competitive. This means that a retailer, fearing they will lose sales, may decide to put up the price by only 50p, and pay the balance of 50p to the government themselves. In this case, the economic incidence is shared because both are worse off.

The smoker is worse off because of the price increase of 20p, and the seller is worse off because 10p must come out of their revenue to pay the government.

Test your knowledge with a quiz

Press Next to launch the quiz
You are allowed two attempts - feedback is provided after each question is attempted.

Read more
GDP latest

UK grows by 0.1% in 1st quarter of 2018.

Read more
Customs unions

Costs and benefits of customs unions.

Read more
New materials

Multiple choice papers for Paper Three.

Read more
Brexit update

Article 50

What trading options are available to the UK?

Savings ratio

Savings ratio falls to lowest level on record.

Read more
Tax avoidance

Double Irish - and a Dutch Sandwich more..

The OECD presents its final package for reform of international tax rules..more

Get the Economics Online app