Burden of a Tax – Economic vs. Legal Incidence

… a core concept in Economic Analysis and Atlas102

Click for MRU video

Click for MRU video

Concept description

The economic incidence (who bears the burden) of a tax differs from the legal incidence (who writes the cheque to the government) in ways that depend on the relative elasticities of supply and demand.

Tyler Cowen (reference below, video on right) summarizes:

  • The more elastic side of the market will pay a smaller share of the tax (smaller burden)
  • The less elastic (more inelastic) side of the market will pay a greater share of the tax (greater burden)

Cowen illustrates a case where the demand is more elastic than the supply producing the result that buyers pay a smaller share of the tax and sellers pay a larger share of the tax.


Elasticity = Escape

When determining how the burden of a particular commodity tax will be shared between buyers and sellers, Cowen notes that one can think of relative elasticity as relative ability to escape the tax:

  • Elastic demand means that demanders have good substitutes for the taxed good and so can escape the tax
  • Elastic supply means that the resources used to produce the taxed good can easily be moved to other industries so they can escape the tax
  • Someone, however, must pay the tax so the burden is determined by the relative elasticities
The burden of payroll taxes

Cowen applies these principles to show why the burden of payroll taxes falls primarily on employees even when the legal incidence is of the tax is on the employers – because the supply of labour tends to be more elastic than the demand for labour.


Practice questions (from MRU Chapter 5)

From http://www.mruniversity.com/node/186782, accessed 29 April 2016.

  1. Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?


Tyler Cowen, Who Pays the Tax?, Marginal Revolution University, 9-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tax-burden-elasticity-affordable-care-act-health-insurance-mandate, accessed 29 April 2016.

Atlas topic and subject

Taxes and Subsidies (core topic) in Economic Analysis.

Page created by: Ian Clark, last modified on 29 April 2016.

Image: Minute 0.20 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tax-burden-elasticity-affordable-care-act-health-insurance-mandate, accessed 29 April 2016.