Where the tax incidence falls depends (in the short run) on the price elasticity of demand and price elasticity of supply. Shared tax incidence : The imposition of a tax can result in a reduction to both consumer and producer surplus relative to the pre-tax scenario.

When the tax incidence falls on the farmer, this burden will typically flow back to owners of the relevant factors of production, including agricultural land and employee wages. If the apple farmer can raise prices by an amount less than $1, then consumers and the farmer are sharing the tax burden. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic (if prices rose, more demand would be lost than extra revenue gained), the farmer has to bear the burden of the tax or face decreased revenues: the tax incidence falls on the farmer. In this example, consumers bear the entire burden of the tax the tax incidence falls on consumers. If the product (apples) is price inelastic to the consumer (whereby if price rose, a small demand loss would be accounted for by the extra revenue), the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1. Imagine a $1 tax on every barrel of apples an apple farmer produces.

The tax incidence is thus said to fall on the employee and due to the need for workers for a particular job, the tax burden also falls, in this case, on the worker. However, some economists think that the worker is bearing almost the entire burden of the tax because the employer passes the tax on in the form of lower wages. For example, United States Social Security payroll taxes are paid half by the employee and half by the employer. Tax incidence does not consider the concept of tax efficiency or the excess burden of taxation, also known as the distortionary cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of a tax. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. Tax incidence is said to “fall” upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Identify who bears the tax burden in various scenarios.

Progressive regressive and flat taxes