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April 11, 2006

Tax payment and tax incidence

Economists often say there’s a difference between who pays a tax and who ultimately bears the cost of that tax. Two examples, says N.C. State University’s Mike Walden, are Social Security and impact fees.

“Tax payment is simply who writes the check, but tax incidence is who ultimately bears the cost if the entity paying that tax can shift that burden,” he says.

“Let me give you two examples:

“Social Security. Half of social security is paid by the employer your boss. But studies show that the worker actually bears the full cost of that Social Security because the employer simply reduces the workers wages buy an amount equal to what the employer has to pay in Social Security. So the employer has shifted the burden to the worker.

“Another example is impact fees paid by builders. The builder may write the check for the impact fee and send it to the local government. But, again, studies show that builders are able to pass on a large amount of that to the homeowner or back to the land owner.”

Posted by deeshore at April 11, 2006 08:00 AM