What is Tax Incidence ?

Tax Incidence or Incidence of Tax refers to the money burden of the tax. Simply put, tax incidence relates to the final resting place of the tax. When a tax is levied, its money burden falls on one individual or another. Under tax incidence, one tries to find out where the burden of money actually falls or who bears the money burden of the tax. 

Impact of Tax Incidence and Incidence of Tax Incidence are two different concepts. The impact of tax falls on the person who pays the tax, first. However, the incidence of tax falls on the person who ultimately pays the tax. It is because the person who pays the tax in the first instance does not necessarily bears the money burden of the tax. In simple terms, the impact is the original burden of the tax; however, the incidence is the ultimate burden of the tax. 

For example, when the government levies export duty on rice, which is first paid by the rice mill owner. Therefore, the impact of export duty on rice is on the mill owner. But, it does not mean that the incidence of export duty will also fall on the mill owner. The mill owner will now pass on the export duty burden to the consumer by charging higher prices. It means that the owner will add the amount of export duty to the price of rice and then charge it from the consumer. Thus the incidence of export duty on rice will be borne by the consumer.