The true measure of the burden of a tax is the change in people’s economic situations as a result of the tax. The changes should be measured as the effects on everyone’s net-of-tax income after all economic adjustments have run their courses.
The burden measure should include not only changes in people’s after-tax incomes in a single year, but the lifetime consequences of the tax change as well. Unfortunately, policymakers are not presented with this type of comprehensive information on the true burden of taxation and must make policy judgments based on incomplete and misleading statistics.
One cannot tell the true burden of a tax just by looking at where or on whom it is initially imposed, or at what it is called. Taxes affect taxpayers’ behavior, triggering economic changes that regularly shift some or even the entire economic burden of a tax to other parties, and alter total output and incomes. Taxes reduce and distort the mix of what people are willing to produce in their roles as workers, savers, and investors.
Taxes increase what these producers seek to charge for their services or products. Changes in the prices and quantities of output in turn affect people in their roles as consumers when they try to spend their incomes. The lost output and other consequences of taxation impose additional costs on the taxpayers that are not reflected in the mere dollar amounts of the tax collections.
