Fiscal Incidence
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In
public finance Public finance refers to the monetary resources available to governments and also to the study of finance within government and role of the government in the economy. Within academic settings, public finance is a widely studied subject in man ...
, a sub-discipline of
economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...
, 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 (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...
taxation 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 i ...
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. F ...
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. ...
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 of the fiscal 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 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 to 1939, 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 and 1939 while paying 5 percent of federal taxes. Barna's conceptual framework—first developed as a doctoral candidate at the
London School of Economics The London School of Economics and Political Science (LSE), established in 1895, is a public research university in London, England, and a member institution of the University of London. The school specialises in the social sciences. Founded ...
under
Nicholas Kaldor Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós, was a Hungarian-born British economist. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare spending, welfare comparisons ...
—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 (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
demonstrated that overall tax policy was mildly progressive — that is, when regressive
state State most commonly refers to: * State (polity), a centralized political organization that regulates law and society within a territory **Sovereign state, a sovereign polity in international law, commonly referred to as a country **Nation state, a ...
-
local Local may refer to: Geography and transportation * Local (train), a train serving local traffic demand * Local, Missouri, a community in the United States Arts, entertainment, and media * ''Local'' (comics), a limited series comic book by Bria ...
tax systems are combined with progressive federal 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 Brookings, is an American think tank that conducts research and education in the social sciences, primarily in economics (and tax policy), metropolitan policy, governance, foreign policy, global econo ...
(1965) and George A. Bishop of the Tax Foundation (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 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 (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 (social and political), power, and the analysis of political activities, political philosophy, political thought, polit ...
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 ...
'', "'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 Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...
, 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 mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...
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 an List of Australian Government entities, Australian Government agency that collects and analyses statistics on economic, population, Natural environment, environmental, and social issues to advi ...
periodically produces empirical estimates of the net fiscal incidence of Australia's 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 Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...
's
Office for National Statistics The Office for National Statistics (ONS; ) is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to the Parliament of the United Kingdom, UK Parliament. Overview The ONS is responsible fo ...
also produces regular estimates of the impact of government taxes and spending on household income.


See also

* Economic justice *
Public interest In social science and economics, public interest is "the welfare or well-being of the general public" and society. While it has earlier philosophical roots and is considered to be at the core of democratic theories of government, often paired ...
* Tax incidence


References

* * * * * * * * *


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)
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