Public Finance, 3rd Edition

The Sources and Uses Approach

The sources and uses approach to economy-wide tax incidence is essentially ad hoc. The incidence of the five 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 ...