What is the absolute tax incidence?

By Ritesh|Updated : September 1st, 2022

The absolute tax incidence is calculated assuming that no other taxes would be imposed in its absence. Differential tax incidence refers to the shift in the economy's distribution of wealth that occurs when one tax replaces another with no change in the overall tax collection.

Details on Absolute Tax Incidence

  • The impact of a particular tax on how economic welfare is distributed is known as tax incidence or tax burden in economics.
  • Economists distinguish between the entities that end up paying the taxes and those that are initially subject to them.
  • The tax burden, which accounts for how the tax affects prices, determines the underlying economic weight of the tax by comparing real earnings or utility costs before and after the tax is imposed.
  • The main idea behind tax incidence is that it depends on the price elasticity of supply and demand rather than the size of the tax imposed (i.e., where the money is collected has no bearing on where the money is collected).
  • The ideals of a preferable tax system, especially justice and transparency, should not be violated by the tax incidence as a matter of general policy.
  • Several applications of the tax incidence theory are made possible.
  • For instance, the employee and employer each contribute 50 per cent of the payroll tax for Social Security in the United States.

Summary:

What is the absolute tax incidence?

The absolute tax incidence is the assumption used in calculating a tax's incidence that no other taxes would be levied in its absence.

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