Public Finance, 2nd Edition

year data are available for state and local governments): federal and state

personal income taxes ($1069); federal payroll tax that Wnances the Social

Security system ($612); general sales (state and local) and selective excise (all

governments) taxes ($360); local property taxes ($240); and federal and state

corporation income taxes ($216).

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The tax incidence studies have for the most part employed one of three

quite diVerent modeling strategies: a heuristic sources and uses approach;

computable general equilibrium (CGE) models; and dynamic models of tax

incidence. Each strategy has its strengths and weaknesses. None is entirely

convincing as a model for determining the overall incidence of a nation's tax

system.

We will begin with the sources and uses approach because it appeared

Wrst in the literature. Indeed, it was the only method available to economists

for economy-wide incidence analysis until the 1970s, when advances in

computer technology and computing algorithms gave birth to the other two

methods.

THE SOURCES AND USES APPROACH

The sources and uses approach to economy-wide tax incidence is essentially

ad hoc. The incidence of the Wve major taxes is determined by a set of

assumptions that allocate the burdens to either the sources or the uses of

income. The assumptions pay some attention to general equilibrium tax

theory, but only some. The approach accepts the principles that individuals

bear the burden of taxation and that the changes in prices in response to

taxation ultimately determine the incidence of the tax. At the same time,

however, it ignores the dead-weight loss arising from taxation. The approach

also considers the incidence of each tax in isolation, ignoring potential

interdependencies among the taxes. Finally, the alternative against which

the current tax system is being compared is usually treated casually. The

general equilibrium with the current tax system should be compared with the

general equilibrium that would exist with an alternative tax system that raises

the same amount of revenue. The usual comparison, however, is with an

equal-revenue, single-rate comprehensive income tax, which is simply as-

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A few cities also levy personal income taxes, and the revenues from these taxes are

included in the data. The sales and excise tax revenues consist of $200 billion from general

sales taxes ($164 billion state, $36 billion local) and $160 billion of from selective excise taxes ($75

billion states, $70 billion federal and $15 billion local). General sales and excise taxes tend to be

treated similarly in economy-wide incidence studies. The property tax data include revenues from

the few states that levy property taxes. The state and local tax data are from the U.S. Bureau of

the Census website: www.census.gov/govs/estimate/99stlss1.xls. The federal tax data are from the

Budget of the United States Government, Fiscal Year 2001, Supplement, U.S. Government

Printing OYce, Washington D.C., 2000, part Five: Historical Tables, Table 2.1.

586 THE SOURCES AND USES APPROACH