Skip to content
Institute for Economics

Tax Incidence

Statutory incidence (who writes the check to the government) rarely matches economic incidence (who bears the loss of surplus).

The Rule of Elasticity

The burden of a tax falls more heavily on the side of the market that is less elastic. If consumers cannot easily change behavior (inelastic demand), firms will pass the tax burden forward via higher prices.

Example: Payroll Taxes

While payroll taxes are often split 50/50 statutorily between employer and employee, empirical labor economics shows that labor supply is highly inelastic compared to labor demand. Therefore, workers bear almost the entirety of the payroll tax via depressed wages.