The Incidence of Sales and Excise Taxes, or Where Do We Put the Transfers?

Abstract

Whether sales or excise taxes are regressive or progressive depends on how the question is asked, and the implicit or explicit definition of what incomes would be were there no taxes is of crucial importance. The problem of comparing actual income after taxes have been paid with estimated incomes if there were no taxes must take into account the fact that public spending, which is financed by taxes, affects the distribution of income. This paper discusses several approaches for dealing with this problem. It focuses on the approach taken by Browning (1978), which concludes that excise and sales taxes are progressive under the reasonable assumption that transfer payments are independent of such taxes. This outcome, however, is dependent upon the pattern of government spending. The comprehensive approach, on the other hand, implies that the incidence of excise and sales taxes may or may not be regressive. The author concludes that it depends on how you ask the question.