Fiscal incidence
Encyclopedia
Fiscal incidence is a concept within public finance
, a sub-discipline within economics
, that refers to the combined overall economic impact of both government
taxation and expenditures on the real economic income
of individuals. While taxation reduces the economic well-being of individuals, government expenditures raise their economic well-being. Fiscal incidence is the term for the overall impact of government taxing and spending considered together.
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.
under Nicholas Kaldor
-- was influential and today serves as the essential framework for fiscal incidence studies conducted by the British government.
Early results for the United States
demonstrated that overall tax policy was mildly progressive
— that is, when regressive
state
-local
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 that 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
(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
. 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
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
, "'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
, 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
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
periodically produces empirical estimates of the net fiscal incidence of Australia's
overall government operations. The United Kingdom
's Office of National Statistics also produces regular estimates of the impact of government taxes and spending on household income.
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...
, a sub-discipline within economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, that refers to the combined overall economic impact of both government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
taxation and expenditures on the real economic income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
of individuals. While taxation reduces the economic well-being of individuals, government expenditures raise their economic well-being. Fiscal incidence is the term for the overall impact of government taxing and spending considered together.
Theory
In theory, governments withdraw resources from societySociety
A society, or a human society, is a group of people related to each other through persistent relations, or a large social grouping sharing the same geographical or virtual territory, 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
Equity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...
of the fiscal
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
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 economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
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 EconomicsLondon School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
under Nicholas Kaldor
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor was one of the foremost Cambridge economists in the post-war period...
-- was influential and today serves as the essential framework for fiscal incidence studies conducted by the British government.
Early results for the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
demonstrated that overall tax policy was mildly progressive
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
— that is, when regressive
Regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...
state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
-local
Localism (politics)
Localism describes a range of political philosophies which prioritize the local. Generally, localism supports local production and consumption of goods, local control of government, and promotion of local history, local culture and local identity...
tax systems are combined with progressive federal
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
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 that 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
Brookings Institution
The Brookings Institution is a nonprofit public policy organization based in Washington, D.C., in the United States. One of Washington's oldest think tanks, Brookings conducts research and education in the social sciences, primarily in economics, metropolitan policy, governance, foreign policy, and...
(1965) and George A. Bishop of the Tax Foundation
Tax Foundation
The Tax Foundation is a Washington, D.C.-based think tank founded in 1937 that collects data and publishes research studies on tax policies at the federal and state levels. The organization is broken into three primary areas of research which are the Center for Federal Fiscal Policy, The and the...
(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
Consumer Expenditure Survey
The Consumer Expenditure Survey is a Bureau of Labor Statistics survey that collects information on the buying habits of U.S. consumers. The program consists of two components — the Interview Survey and the Diary Survey — each with its own sample...
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
National Income and Product Accounts
The National Income and Product Accounts are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce...
. 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
Political Science is a social science discipline concerned with the study of the state, government and politics. Aristotle defined it as the study of the state. It deals extensively with the theory and practice of politics, and the analysis of political systems and political behavior...
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
Econometrica is a peer-reviewed academic journal of economics, publishing articles not only in econometrics but in many areas of economics. It is published by the Econometric Society and distributed by Wiley-Blackwell. Econometrica is one of the most highly ranked economics journals in the world...
, "'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
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, 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
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
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
Australian Bureau of Statistics
The Australian Bureau of Statistics is Australia's national statistical agency. It was created as the Commonwealth Bureau of Census and Statistics on 8 December 1905, when the Census and Statistics Act 1905 was given Royal assent. It had its beginnings in section 51 of the Constitution of Australia...
periodically produces empirical estimates of the net fiscal incidence of Australia's
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
overall government operations. The United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
's Office of National Statistics also produces regular estimates of the impact of government taxes and spending on household income.
External links
- The Effects of Taxes and Benefits on Household Income, 2001-02 (United Kingdom)
- Government Benefits, Taxes and Household Income, Australia, 1998-99
- Tax 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 Analysis
- MOVING BEYOND TRADITIONAL CASH MEASURES OF ECONOMIC WELL-BEING: INCLUDING INDIRECT BENEFITS AND INDIRECT TAXES (Australia)