Tax Incidence Applied to the United States
Now that we understand the concepts of tax shifting and incidence, lets look at the probable incidence of each of the various major sources of tax revenues in the United States.
Personal Income Tax
The incidence of the personal income tax generally falls on the individual because there is little chance for shifting it. But there might be exceptions to this. Individuals and groups who can effectively control the price of their labor services may be able to shift a part of the tax. For example, doctors, dentists, lawyers, and other professional people who can readily increase their fees may do so because of the tax. Unions might regard personal income taxes as part of the cost of living and, as a result, bargain for higher wages. if they are successful, they may shift a portion of the tax from workers to employers (who may be able to pass this burden of the higher wages to be paid on to the consumer in the form of higher prices). Generally, most experts conclude that the individual on whom the tax is initially levied bears the burden of the personal income tax. The same ordinarily holds true of payroll and inheritance taxes.
Corporate Income Tax
The incidence of the corporate income tax is much less certain. The traditional view has it that a firm charging the profit-maximizing price and producing the profit-maximizing output will have no reason to change price or output when a corporate income tax is imposed. In other words, the price and output combination which yields the greatest profit before the tax will still be the most profitable after the government takes a fixed percentage of the firm's profits in the form of income taxes. According to this view, the company stockholders (owners) must bear the incidence of the tax in the form of lower dividends or a smaller amount of retained earnings. On the other hand, some economists argue that corporate income tax is shifted in part to consumers through higher prices and to resource suppliers through lower prices. Ultimately, the incidence of the corporate income tax may well be shared by stockholders and the firm's customers and resource suppliers.
Sales and Excise Taxes
Sales and excise taxes are the hidden taxes of our economy. They are hidden because such taxes are often partly or largely shifted by sellers to consumers through higher product prices (though this does vary). Because a sales tax covers a much wider range of products than an excise tax, there is little chance for consumers to resist the price boosts which sales taxes entail by reallocating their expenditures to untaxed lower priced products. Excises, however, fall on a relatively short, select list of goods. Therefore, the possibility of consumers turning to substitute goods and services is greater. With other excises, however, modest price increases have smaller effects on sales. Excises on gasoline, cigarettes, and alcoholic beverages are examples. Here there are few good substitute products to which consumers can turn as prices rise. For these goods, the seller is in a better position to shift the tax. Imagine a person who is addicted to nicotine; this person will likely carry the burden of the tax because his or her demand is relatively high and inelastic.
Many property taxes are borne by the property owner simply because there is no other party to whom they can be shifted. This is typically true in the case of taxes on land, personal property, and owner-occupied residences. For example, even when land is sold, the property tax is not likely to be shifted. The seller will discount the value of the land to allow for future taxes which must be paid on it, and this expected taxation will be reflected in the price a buyer is willing to offer for the land. Taxes on rented and business properties are a different story. Taxes on rented property can be, and usually are, shifted wholly or in part from the owner to the tenant by the process of boosting the rent. Business property taxes are treated as a business cost and therefore are taken into account in establishing product price; thus such taxes are ordinarily shifted to the firm's customers.