What is the Effective Incidence of Tax?

By Shivank Goel|Updated : August 25th, 2022

The 'effective incidence of Tax' refers to the situation in which the original bearer of a tax passes it on to a second person, and that person eventually bears the burden and pays the tax. Therefore, the entity or individual who bears the tax burden is known as the incidence of tax.

However, 'formal incidence of tax' refers to the entity or person who is obliged to pay the tax originally but passes it on to another person/entity.

Incidence of Tax: Types

The 'effective incidence of tax' indicates that the person who eventually pays a tax may not be the actual bearer of the tax burden. Determining this part of the problem of who bears the burden eventually is referred to as the 'incidence of taxation.

'Formal incidence of tax' refers to the entity or person who is legally responsible for the tax burden but fails to do so and passes the burden onto another person. The formal incidence of a tax will more often be different from the effective incidence of tax owing to several factors and price mechanisms.

Related Questions:-

Comments

write a comment

FAQs

  • An effective incidence of tax refers to the situation where a person has to eventually bear the burden of tax while not being legally obliged to pay.

  • The ‘formal incidence of tax’ refers to the situation of an entity or person who is legally obliged to pay the tax.

Featured Articles

Follow us for latest updates