Tax Shifting

Tax Shifting

Tax, Shifting and Incidence, the study of the ways in which the burden of taxation is shifted among persons and institutions in the economy. It thus amounts to a study of the general and particular effects of different taxes on the allocation of resources and the distribution of income. Nothing precise can be said about the amounts of tax that can be shifted, but the tendencies can be established fairly clearly.

Taxes on income, particularly progressive taxes, have effects on incentives to work and save. There may be possibilities of tax shifting where the demand for scarce ability is inelastic, that is, permits pre-tax incomes to be raised to offset high tax rates, or where some people have more opportunities for switching to non-taxed occupations or sources of income than others. These effects, however, are essentially long-run and conjectural, since the effects of a general tax on income may be onset or reinforced by the economic effects of Government spending of the tax proceeds. The effect on saving is equally uncertain: it is difficult to assess the net effect of income tax on saving, and the effect on the economy of a change in saving depends in any event upon the general level of activity in the economy.

Taxes on the owners of productive resources are not confined to labour. They include taxes on land ownership (such as site value taxes), on long-term improvements to land (such as local rates on property) and on less durable goods (such as motor taxation). The theory of economic rent suggests that the total earnings of non-reproducible resources in fixed supply such as land will be entirely determined by demand. Taxes on the owners of such resources cannot be shifted because the owners cannot alter demand, reduce supply to raise price, or sell the land except at a price reflecting the tax liability. Such a tax in theory stays where it is levied and thus constitutes an 'ideal' tax from the viewpoint of knowing its economic effects. This conclusion ignores difficulties of estimating site value where sites are developed. If the estimate is incorrect the tax may fall partly on income from improvements, investment in further improvement may be discouraged; as a result their prices may rise and the burden of the tax will be partly passed on to buyers and users of the improvements.

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