Tax Incidence

AAA

DEFINITION of 'Tax Incidence'

An economic term for the division of a tax burden between buyers and sellers. Tax incidence is related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.

INVESTOPEDIA EXPLAINS 'Tax Incidence'

Tax incidence reveals which group, the consumers or producers, will pay the price of a new tax. For example, the demand for cigarettes is fairly inelastic, which means that despite changes in price, the demand for cigarettes will remain relatively constant. Let's imagine the government decided to impose an increased tax on cigarettes. In this case, the producers may increase the sale price by the full amount of the tax. If consumers still purchased cigarettes in the same amount after the increase in price, it would be said that the tax incidence fell entirely on the buyers.

RELATED TERMS
  1. Economics

    A social science that studies how individuals, governments, firms ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another ...
  3. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  4. Demand

    An economic principle that describes a consumer's desire and ...
  5. Supply

    A fundamental economic concept that describes the total amount ...
  6. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
Related Articles
  1. Taxes

    After-Tax Balance Rules For Retirement ...

  2. Taxes

    Tax-Saving Advice For IRA Holders

  3. Retirement

    Tax Tips For The Individual Investor

  4. thinkstock|istock
    Economics

    Understanding Supply-Side Economics

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center