Flypaper theory (economics)
Encyclopedia
The flypaper theory of tax incidence
is a pejorative term used by economist
s to describe the assumption that the burden of a tax, like a fly
with flypaper, sticks wherever it first lands. Economists point out several flaws with the assumption:
For example, consider a tax
levied on a luxury item such as jewelry. Such a tax, while intended to target the wealthy, may not actually accomplish this objective, as the wealthy can simply choose to buy less jewelry. Instead of collecting more money from the wealthy, the tax has the effect of hurting jewelry merchants, who are not the intended targets of the tax.
As another example, suppose a tax is levied on the sellers of a product
. The sellers may simply raise the price of the product, thus shifting the burden of the tax onto the buyer
s of the product.
This should not be confused with the flypaper effect
, which holds that money from a federal authority to a state authority tends to increase overall expenditure rather than merely substitute for locally-raised revenue.
Tax incidence
In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax...
is a pejorative term used by economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s to describe the assumption that the burden of a tax, like a fly
Fly
True flies are insects of the order Diptera . They possess a pair of wings on the mesothorax and a pair of halteres, derived from the hind wings, on the metathorax...
with flypaper, sticks wherever it first lands. Economists point out several flaws with the assumption:
- it ignores the elasticityElasticity (economics)In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...
of goods; and - it ignores the ability of producers to shift the cost of the tax onto consumerConsumerConsumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s.
For example, consider a 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...
levied on a luxury item such as jewelry. Such a tax, while intended to target the wealthy, may not actually accomplish this objective, as the wealthy can simply choose to buy less jewelry. Instead of collecting more money from the wealthy, the tax has the effect of hurting jewelry merchants, who are not the intended targets of the tax.
As another example, suppose a tax is levied on the sellers of a product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
. The sellers may simply raise the price of the product, thus shifting the burden of the tax onto the buyer
Buyer
When someone gets characterised by their role as buyer of certain assets, the term "buyer" gets new meaning:A "buyer" or merchandiser is a person who purchases finished goods, typically for resale, for a firm, government, or organization...
s of the product.
This should not be confused with the flypaper effect
Flypaper effect
The flypaper effect is the finding that "money sticks where it hits", like flies stick to flypaper. The concept was first described in this metaphorical way by Arthur Okun in response to the research of his colleague, Edward Gramlich, published in 1979 as The Stimulative Effect of Government Grants...
, which holds that money from a federal authority to a state authority tends to increase overall expenditure rather than merely substitute for locally-raised revenue.