In
public finance
Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achie ...
, a sub-discipline of
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, fiscal incidence is the combined overall economic impact of both
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
and
expenditure
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...
s on the real economic
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
of individuals.
While taxation reduces the economic well-being of individuals, government expenditures raise their economic well-being. Fiscal incidence is the overall impact of government taxing and spending considered together.
Theory
In theory, governments withdraw resources from
society
A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Socie ...
in the form of taxation, and contribute resources back into society in the form of expenditures. However, the burdens of taxation are not borne equally by individuals, and the benefits of government expenditures are not distributed equally throughout society. As a result, the distribution of tax burdens and government expenditure benefits is an important economic question to those concerned with the
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
of the
fiscal
Fiscal usually refers to government finance. In this context, it may refer to:
Economics
* Fiscal policy, use of government expenditure to influence economic development
* Fiscal policy debate
* Fiscal adjustment, a reduction in the government ...
system. When the economic incidence of taxation is combined with the economic incidence of government expenditures, the result is a measure of the overall increase or decrease in
welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
that individuals enjoy from the state's taxing and spending policies. This is referred to as fiscal incidence.
Empirical literature
Early empirical studies of fiscal incidence date to the 1940s. Two early studies included Charles Stauffacher's (1941) study of the United States from 1930–39, and Tibor Barna's (1945) study of the United Kingdom for 1937. Both studies identified substantial income redistribution with Stauffacher concluding that the lowest income group received 27 percent of federal spending between 1930-39 while paying 5 percent of federal taxes. Barna's conceptual framework—first developed as a doctoral candidate at the
London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
under
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós, was a Cambridge economist in the post-war period. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), d ...
—was influential and today serves as the essential framework for fiscal incidence studies conducted by the British government.
Early results for the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
demonstrated that overall tax policy was mildly
progressive — that is, when
regressive state
State may refer to:
Arts, entertainment, and media Literature
* ''State Magazine'', a monthly magazine published by the U.S. Department of State
* ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, United States
* ''Our S ...
-
local
Local may refer to:
Geography and transportation
* Local (train), a train serving local traffic demand
* Local, Missouri, a community in the United States
* Local government, a form of public administration, usually the lowest tier of administrat ...
tax systems are combined with progressive
federal
Federal or foederal (archaic) may refer to:
Politics
General
*Federal monarchy, a federation of monarchies
*Federation, or ''Federal state'' (federal system), a type of government characterized by both a central (federal) government and states or ...
taxes, the result is mildly progressive overall. On the spending side, early results illustrated that the distribution of expenditure benefits as a percentage of income was progressive as well, making the overall fiscal system more progressive than is apparent from the tax system alone. As a result, early studies found that overall fiscal incidence resulted in a net
redistribution of income between income groups within the United States, from higher-income individuals to lower-income individuals. Here the term "progressive" refers to benefits accruing to lower-income individuals as opposed to those with higher incomes; "regressive" conversely refers to benefits accruing to higher-income individuals as opposed to those with lower incomes. The neutrality of these terms has been debated, but they are widely used in economic literature.
In the mid-1960s, two major studies established an approach that was often replicated in the following decades. W. Irwin Gillespie of the
Brookings Institution
The Brookings Institution, often stylized as simply Brookings, is an American research group founded in 1916. Located on Think Tank Row in Washington, D.C., the organization conducts research and education in the social sciences, primarily in ec ...
(1965) and George A. Bishop of the
Tax Foundation
The Tax Foundation is an American think tank based in Washington, D.C. It was founded in 1937 by a group of businessmen in order to "monitor the tax and spending policies of government agencies". The Tax Foundation collects data and publishes ...
(1967) published extensive studies of U.S. taxes and spending for 1960 and 1961–65, respectively. Gillespie criticized previous literature for its limited scope and inadequate incidence analyses. Bishop departed from previous literature as well, basing tax and spending allocations on a single, consistent household survey—the
Consumer Expenditure Survey The Consumer Expenditure Survey (CE or CEX) is a Bureau of Labor Statistics (BLS) household survey that collects information on the buying habits of U.S. consumers. The program consists of two components — the Interview Survey and the Dia ...
from the Bureau of Labor Statistics, which was relatively new at the time—and developing a broad income concept rooted in the framework of the
National Income and Product Accounts
The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general econ ...
. Both studies found that the U.S. tax system was roughly proportional overall and mildly progressive over some ranges, while the distribution of expenditure benefits was sharply progressive, resulting a progressive overall distribution of fiscal incidence for 1961 and 1965.
The results of Bishop's 1967 study were replicated subsequently by several academics, such as
Morgan Reynolds and
Eugene Smolensky
Eugene Smolensky is an economist and emeritus professor at the Goldman School of Public Policy, University of California, Berkeley, where he served as Dean from 1988 to 1997.
He is Vice President of the International Institute of Public Finance an ...
(1977), and were also utilized as the source data in a study in the
political science
Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and la ...
literature, ''The Politics of Redistribution'' (1970) by Brian R. Fry and Richard F. Winters. Additionally, they prompted a 1970 critical response by H. Aaron and M. McGuire in ''
Econometrica
''Econometrica'' is a peer-reviewed academic journal of economics, publishing articles in many areas of economics, especially econometrics. It is published by Wiley-Blackwell on behalf of the Econometric Society. The current editor-in-chief is Gui ...
'', "'Public Goods and Income Distribution".
In the 1990s a branch of fiscal incidence known as "benefit incidence analysis" grew in popularity. Largely pioneered by researchers at the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
, this approach focused narrowly on the distributional impact of education, health and transfer spending programs. Benefit incidence analyses typically provide detailed estimates of whether poverty-reducing programs—particularly in developing countries—reach targeted populations. Much of the literature is summarized in Thomas Selden and Michael Wasylenko (1992) and Dominique van de Walle (1996). Benefit incidence studies typically find spending on health, education and transfer payments to be strongly progressive, while finding mixed results on
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
progressivity in different countries.
In some countries, official government agencies produce official studies of fiscal incidence to assist lawmakers in the design of tax and spending policies. For example, the
Australian Bureau of Statistics
The Australian Bureau of Statistics (ABS) is the independent statutory agency of the Australian Government responsible for statistical collection and analysis and for giving evidence-based advice to federal, state and territory governments ...
periodically produces empirical estimates of the net fiscal incidence of
Australia's
Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by a ...
overall government operations. The
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
's
Office of National Statistics
An office is a space where an organization's employees perform administrative work in order to support and realize objects and goals of the organization. The word "office" may also denote a position within an organization with specific dut ...
also produces regular estimates of the impact of government taxes and spending on household income.
See also
*
Tax incidence
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The tax ...
References
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External links
The Effects of Taxes and Benefits on Household Income, 2001-02 (United Kingdom)Government Benefits, Taxes and Household Income, Australia, 1998-99Tax Burdens and Benefits of Government Expenditures By Income Class, 1961 and 1965 (United States)Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991-2004 (United States)Who Benefits from Health Sector Subsidies? Benefit Incidence AnalysisMOVING BEYOND TRADITIONAL CASH MEASURES OF ECONOMIC WELL-BEING: INCLUDING INDIRECT BENEFITS AND INDIRECT TAXES (Australia){Dead link, date=December 2019 , bot=InternetArchiveBot , fix-attempted=yes
Tax incidence