Distinguish the legal remitter from the people whose opportunities change after market responses. Work through price, wage, asset-value and location channels, and test the chapter’s property-tax example against an explicitly stated competitive model.
Allow about 170 minutes for reading, learning and immediate practice. Multi-day exercises run alongside later lessons.
Learning objectives
Explain why remittance is insufficient to establish incidence.
Calculate buyer and seller burdens in an invented competitive market.
Distinguish four adjustment channels and identify their evidence needs.
Read before practising
Assigned source readings
The book text is the source. The lesson, invented cases and practice tasks are accompanying teaching material. Page numbers below refer to the downloadable full-book PDF, whose pagination can differ from the manuscript’s printed contents.
Source: The Lost Lesson: Economics After the Slogans. The supplied source text has not been rewritten.
Develop the argument
The lesson
Start with an accounting distinction
The chapter opens by challenging the idea that the person or institution named on a tax bill necessarily bears its full economic burden. Statutory liability describes a legal obligation to remit. Economic incidence describes how the policy changes people’s real opportunities after relevant prices and behaviour adjust. A firm may send the payment while some burden appears in customer prices, employee compensation or investor returns. Equally, the firm cannot simply choose to make someone else bear every cost. Its alternatives and the alternatives available to other participants constrain the adjustment.
The chapter’s first section is therefore a useful instruction to follow the chain beyond the cheque. Begin by specifying the tax base, rate, timing and legal remitter. Then describe the market and the counterfactual without the tax. Record a gross customer price separately from a seller’s net receipt. This prevents a payment to government from being counted twice or confused with a loss of the same amount to every participant. The source’s epigraph and political rhetoric frame the argument; neither establishes the incidence of a particular tax.
Elasticity is a conditional response, not a moral label
Section II identifies the relative ability to adjust as central. In an ordinary competitive partial-equilibrium model, the comparatively less responsive side bears more of a small tax wedge. MIT’s public-finance lecture supplies an independent explanation of this rule and distinguishes remittance from burden. The rule concerns a specified supply and demand relationship, with assumptions about competition and price adjustment. It is not a claim that every tax has the same incidence regardless of institutions. Binding price controls, bargaining arrangements and changes in other markets can require a different model.
Use the original numerical case below to make the distinction concrete. A wedge is the gap between what a buyer pays and what a seller retains. Equilibrium requires the quantity buyers want at their gross price to match the quantity sellers offer at their net price. Requiring the seller rather than the buyer to remit does not change that same wedge under the stated competitive assumptions. Do not infer equal sharing from the mere presence of two sides: the equal split in this particular case comes from its chosen schedules. Different slopes or constraints can change the result.
Four channels, different clocks
The source then traces price, wage, asset-value and location channels. A price channel changes what customers pay. A wage channel changes compensation or employment opportunities. An asset-value channel incorporates expected future net returns into what buyers will pay today; a lower sale value can burden an existing owner before a later buyer enters. A location channel changes where activity, investment or people choose to operate. These channels can interact, so a list is not a set of four amounts to add without checking for overlap.
Time matters. An existing machine may have few alternative uses now, while a future investor can choose another project. A worker may be unable to change jobs immediately but have more options over several years. Section IV applies this reasoning to corporate taxes and argues that burdens can reach workers and consumers. The cited Fuest, Peichl and Siegloch study’s publisher abstract reports substantial wage incidence in its German municipal setting and heterogeneous effects. That is evidence about a defined setting, not a universal allocation for every corporate tax. The manuscript’s citation title differs from the publisher’s actual title, which is linked below. A careful memo states the setting, horizon and uncertainty before transferring a result elsewhere.
Publisher abstract and bibliographic details checked. The full study has not been independently audited for this course.
Worked example · invented for this course
Original course example: a twenty-unit tax wedge
A fictional competitive market has demand Q = 100 − buyer price and supply Q = seller net price. There are no price controls, externalities or other-market changes. A tax of 20 units is imposed per item; government spending is outside this incidence calculation.
Without the tax, buyer and seller prices are the same: 100 − P = P gives P = 50 and Q = 50.
With the tax, buyer price = seller net price + 20. Substitute into demand: 100 − (seller net price + 20) = seller net price.
Seller net price is 40, buyer price is 60, and quantity is 40. Buyers pay 10 more and sellers receive 10 less per remaining item.
Check the wedge: 60 − 40 = 20. Tax revenue is 20 × 40 = 800, but revenue is not itself a measure of deadweight loss.
If buyers remit instead, impose the same gross-to-net wedge and solve again. Under these assumptions, the allocation is unchanged.
What follows: The schedules generate equal per-item incidence here. They do not establish equal incidence in other markets or the policy’s net welfare once public spending and other effects are considered.
Train the skill
Practice and evidence
1. Change the responsiveness
Replace supply in the worked example with Q = 2 × seller net price. Keep demand and the tax unchanged. Solve the before and after equilibria.
Deliverable: A calculation sheet with prices, quantities, per-item burdens and a 250-word interpretation.
Show all equations and identify gross and net prices.
Compare the shares with the original equal-slope case.
State which assumptions allow remitter neutrality.
Review criteria
Total available: 10 points
Calculation 4 points
Obtains before price 100/3 and quantity 200/3; after seller price 80/3, buyer price 140/3 and quantity 160/3.
Incidence 3 points
Identifies buyer burden 40/3 and seller burden 20/3 per remaining unit.
Scope 3 points
Explains that the result is conditional and does not establish net welfare.
2. Map the four channels
A fictional tax reduces the expected net return on a local factory. Build a mechanism map without assuming that customers or workers absorb a fixed share.
Deliverable: A two-horizon map and a 500-word evidence plan.
Include customers, workers, current owners and prospective investors.
Distinguish an immediate asset repricing from a later investment response.
Name evidence that could show little or no response in each channel.
Review criteria
Total available: 10 points
Mechanisms 4 points
Links each proposed effect to a choice or price adjustment.
Timing and accounting 3 points
Distinguishes horizons and avoids double counting capitalization with the same future income loss.
Evidence 3 points
Identifies discriminating observations rather than asserting a universal share.
Transfer the learning
Which part of an incidence claim in public debate is an observed adjustment, and which part is an assumed ability to pass a cost on?
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Formative self-check
Test your understanding
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