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Abstract
Economists teach that tax incidence is invariant to statutory incidence. We offer two examples in which statutory incidence affected tax policy and argue that statutory incidence matters because politicians enact statutes and courts interpret them.
JEL Codes: H22, H25, H71
Keywords: statutory incidence, economic incidence, gross receipts tax, Affordable Care Act
I. Introduction
Economists frequently claim that the economic incidence of a tax is invariant to its statutory or legal incidence (Rosen and Gayer 2014, p. 303). That is, whether the tax authorities physically collect a tax from the buyer or the seller, the ultimate impact of the tax on prices, quantities, and the distributions of the gains from trade will be identical. The reason for this is that the party bearing the legal incidence of a tax may change his or her behavior in ways that cause some, or even all, of the tax burden to shift to other parties. For example, taxing the seller of an item may cause the seller to raise prices, thereby shifting part or all of the tax to buyers. The widely understood price-increasing consequences of cigarette taxes levied on tobacco firms or alcohol taxes levied on beer and spirits producers are examples of this phenomenon.
Suppose the state levied a 5 percent tax on a product or group of products and required the seller to remit the tax. Alternatively, suppose that the state levied a 5 percent tax on a product or group of products but required the buyer to remit the tax. Economics teaches that the true tax burden would be same in both cases. When the tax is levied on sellers, they pass some of the tax along to buyers in the form of higher prices When the tax is levied on buyers, the amount they are willing to pay decreases to offset some or all of the tax. In both cases, the result is the same: the ultimate sharing of the burden among these stakeholders depends on the relative elasticities of supply and demand in the market. Hence, for the purposes of economic incidence, the standard conclusion is that legal incidence does not matter.1
Economists' exposition of tax incidence is fine as far as it goes, and understanding that true tax incidence...