Fiscal Incidence - Theory

Theory

In theory, governments withdraw resources from society 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.

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