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Tax burdens reflect the total cost of a tax, but the burden is not necessarily borne by the person that is legally liable to the pay the tax if the tax can be passed on to others through higher prices, lower input payments, or lower returns on capital for investors. Economists measure the economic incidence of taxes taking into account how tax burdens are shifted forward as higher prices paid by consumers or backward as lower payments paid to labour, capital, and other factors used in producing goods and services.
Tax burdens also refer to the adverse consequences of taxes over and above the amount collected. These costs, referred to by economists as the “deadweight loss” or “excess burden” of taxation, are discussed at various points throughout the book, beginning in chapter 2.
In considering tax burdens at the personal level, it is frequently necessary to look to the burdens of taxpayers net of the benefits they receive, as in the case of payroll taxes for employment insurance and the Canada/Quebec Pension Plan. Also, in tax policy the intergenerational shifting of burdens is an important issue.
Tax burdens can be measured annually or (for individuals) over a lifetime. The burden of taxes is typically measured against “economic income,” which is defined broadly as the resources that people pay for goods and services over their lifetime. On an annual basis, and corresponding to the GDP, economic income is measured according to household receipts, such as wages and salaries, investment income, capital gains, and rents. The concept of economic income will receive more attention at various points in this book, where we compare it to other concepts of income, such as accounting and taxable income.
Varying According to Ability To Pay
Governments use both taxes and transfers to change the distribution of income. Transfers, such as those that fund public health care and education, family allowances, pension supplements, and child tax benefits, are intended to reduce poverty or provide basic income support for the population. Taxes may be levied according to “the ability to pay” principle, with higher burdens (measured as a percentage of income) assessed against those who have more resources to pay tax. A tax structure is said to be “progressive” if taxes as a percentage of ability to pay (often taken to mean income) increase as ability to pay increases, “regressive” if they decrease, and “proportional” if they are constant. Income taxes can be made progressive by providing exemptions or credits to low-income households and assessing tax rates that rise with the level of income earned by an individual or family. Sales taxes are often viewed as being regressive, but can be made progressive by exempting necessities or taxing them at a low rate .
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