TAX INCIDENCE
Kate Smith
London School of Economics
, Motivation: Incidence
• How do public policies affect distribution of welfare in society?
• Examples:
– Who benefits from increasing housing benefits?
– Who benefits from WFTC/EITC policies that subsidize low-skill
workers?
• Key intuition: statutory incidence is usually meaningless because of
equilibrium mechanisms
– Part (or all) housing benefits may be captured by landlords
– Part (or all) of EITC may be captured by firms or consumers or
high-skilled workers
, Incidence and distributional analysis
• Ideal goal: Analyze full distribution of welfare before/after a policy
variation
• Complicated in practice
• Aggregate agents in meaningful categories:
– Consumers/producers: e.g. landlords vs low income renters
– Production factors: labor vs capital
– Income groups
– Geographical units
– Generation/cohorts
, Introduction
• Incidence theory:
– Key to think about market structure and equilibrium interactions
to understand effect of policies
– Positive analysis: incidence virtually always depends on key empir-
ical parameters
• Empirical analysis of incidence:
– Mostly reduced form: focus on effect of policy on prices
– Deal with complicated issue of identification of equilibrium mecha-
nisms
• Interplay of theory and empirics in incidence literature critical to gain
better understanding of functioning of markets
• First necessary step of welfare analysis
Kate Smith
London School of Economics
, Motivation: Incidence
• How do public policies affect distribution of welfare in society?
• Examples:
– Who benefits from increasing housing benefits?
– Who benefits from WFTC/EITC policies that subsidize low-skill
workers?
• Key intuition: statutory incidence is usually meaningless because of
equilibrium mechanisms
– Part (or all) housing benefits may be captured by landlords
– Part (or all) of EITC may be captured by firms or consumers or
high-skilled workers
, Incidence and distributional analysis
• Ideal goal: Analyze full distribution of welfare before/after a policy
variation
• Complicated in practice
• Aggregate agents in meaningful categories:
– Consumers/producers: e.g. landlords vs low income renters
– Production factors: labor vs capital
– Income groups
– Geographical units
– Generation/cohorts
, Introduction
• Incidence theory:
– Key to think about market structure and equilibrium interactions
to understand effect of policies
– Positive analysis: incidence virtually always depends on key empir-
ical parameters
• Empirical analysis of incidence:
– Mostly reduced form: focus on effect of policy on prices
– Deal with complicated issue of identification of equilibrium mecha-
nisms
• Interplay of theory and empirics in incidence literature critical to gain
better understanding of functioning of markets
• First necessary step of welfare analysis
