effective incidence

The effective incidence of a tax refers to who ultimately bears the economic burden of that tax, rather than who is legally obligated to pay it to the government. This concept is crucial in economics because governments often use taxes to influence income and wealth distribution.12

For instance, a sales tax legally falls on the seller, but if the seller passes this cost to consumers through higher prices, the consumers bear the effective incidence. Similarly, payroll taxes might be shifted to employees through lower wages if labor is abundant, or borne by employers if labor is scarce. The ability to shift the tax burden depends on market power and the availability of substitutes. Understanding effective incidence helps analyze the true economic impact of government policies.213