Who pays?—Reorganizing tax burden based on purchasing power

Who pays?—Reorganizing tax burden based on purchasing power | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Who pays?—Reorganizing tax burden based on purchasing power Kazuto Tominaga This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-2213667/v2 This work is licensed under a CC BY 4.0 License Status: Posted Version 2 posted You are reading this latest preprint version Show more versions Abstract People generally believe that a tax levied on sellers of some commodity is at least partly paid by buyers if its price rises. Contrary to this shared belief, this paper demonstrates, based on the formal treatment of purchasing power, that such ``shifting of tax burden'' does not occur in essence. Thus indirect taxes that assume such shifting are no different from direct ones in respect of tax payment: sellers pay the whole tax, and buyers only suffer a diminution in the value of their monetary assets by the price rise. We show a possible cause of the misconception is cognitive biases, including money illusions. We also examine how tax payment and economic incidence differ and show that economic incidence, the widely accepted measure of changes in welfare, cannot be a yardstick for evaluating ``who pays the tax'' at the same time. In addition, we discuss other types of taxes where a taxpayer does not deliver the tax directly to the government, such as withholding income taxes. We thereby show that the taxpayer pays the tax as intended (i.e., paid by employees in this case) owing to the explicit designation of taxpayers by law, in contrast to ``indirect'' taxes. JEL Classification: H20 , H22 , K34 Tax burden Tax payment Tax shifting Tax incidence Indirect tax Payroll tax Value-added tax Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 2 posted You are reading this latest preprint version Show more versions Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-2213667","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":148490516,"identity":"0da782e7-f552-4300-9b02-4290d36c972c","order_by":0,"name":"Kazuto Tominaga","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA2ElEQVRIiWNgGAWjYBACCSjNw8DAfADElyFOywGwFrYEEJ+HaC0giwyg1hEAku3Hn0l/qNgmYz4j5/OrGzUWPAzsh49uwKdFmichTeLAmds8Mjdyt1nnHAM6jCct7QY+LXIMCcckDrbd5pGQzt1mnMMG1CLBY4ZfC//DNqiWnGfGOf+I0CItkcwG08L8OLeNCC2SM54xW5wB+kVC/pkZc26fBA8bIb9InE9/eKOi4ra9BM/hx59zvtXJ8bMfPoZXCzJgA0cSG7HKQYD5AymqR8EoGAWjYOQAAHd2Q76/fEXDAAAAAElFTkSuQmCC","orcid":"","institution":"","correspondingAuthor":true,"submittingAuthor":false,"prefix":"","firstName":"Kazuto","middleName":"","lastName":"Tominaga","suffix":""}],"badges":[],"createdAt":"2022-10-28 15:32:52","currentVersionCode":2,"declarations":"","doi":"10.21203/rs.3.rs-2213667/v2","doiUrl":"https://doi.org/10.21203/rs.3.rs-2213667/v2","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":29443191,"identity":"4616bc87-a0f0-4a37-a979-511f16568080","added_by":"auto","created_at":"2022-11-23 16:50:29","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":304085,"visible":true,"origin":"","legend":"","description":"","filename":"vmain.pdf","url":"https://assets-eu.researchsquare.com/files/rs-2213667/v2_covered.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"\u003cp\u003eWho pays?—Reorganizing tax burden based on purchasing power\u003c/p\u003e","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Tax burden, Tax payment, Tax shifting, Tax incidence, Indirect tax, Payroll tax, Value-added tax","lastPublishedDoi":"10.21203/rs.3.rs-2213667/v2","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-2213667/v2","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003ePeople generally believe that a tax levied on sellers of some commodity is at least partly paid by buyers if its price rises. \u0026nbsp;Contrary to this shared belief, this paper demonstrates, based on the formal treatment of purchasing power, that such ``shifting of tax burden'' does not occur in essence. \u0026nbsp;Thus indirect taxes that assume such shifting are no different from direct ones in respect of tax payment: sellers pay the whole tax, and buyers only suffer a diminution in the value of their monetary assets by the price rise. \u0026nbsp;We show a possible cause of the misconception is cognitive biases, including money illusions. \u0026nbsp;We also examine how tax payment and economic incidence differ and show that economic incidence, the widely accepted measure of changes in welfare, cannot be a yardstick for evaluating ``who pays the tax'' at the same time. \u0026nbsp;In addition, we discuss other types of taxes where a taxpayer does not deliver the tax directly to the government, such as withholding income taxes. \u0026nbsp;We thereby show that the taxpayer pays the tax as intended (i.e., paid by employees in this case) owing to the explicit designation of taxpayers by law, in contrast to ``indirect'' taxes.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eJEL Classification:\u003c/strong\u003e H20 , H22 , K34\u003c/p\u003e","manuscriptTitle":"Who pays?—Reorganizing tax burden based on purchasing power","msid":"","msnumber":"","nonDraftVersions":[{"code":2,"date":"2022-11-23 16:50:13","doi":"10.21203/rs.3.rs-2213667/v2","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}},{"code":1,"date":"2022-11-01 06:43:55","doi":"10.21203/rs.3.rs-2213667/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"daf40ba6-67a7-4d21-9148-2db324c2ec0b","owner":[],"postedDate":"November 23rd, 2022","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2022-11-02T01:14:13+00:00","versionOfRecord":[],"versionCreatedAt":"2022-11-23 16:50:13","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v2","identity":"rs-2213667","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-2213667","identity":"rs-2213667","version":["v2"]},"buildId":"FbvkV6FR0MCFSLy54lSbu","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}