Taxes, elasticity & incidence

Tax incidence is about who really bears the cost of a tax, which can differ completely from who legally pays it. The side a tax is placed on doesn't decide who ultimately shoulders it — elasticity does. The more inelastic side of the market, the one less able to change its behaviour when the price moves, ends up bearing more of the burden, whether the law taxes the buyer or the seller. A tax also drives a wedge between what buyers pay and what sellers receive, so some mutually beneficial trades stop happening — that lost value is deadweight loss, a cost on top of the revenue collected. And revenue itself has limits: the Laffer curve notes that beyond some rate, a higher tax shrinks the taxed activity so much that total revenue falls rather than rises. Understanding incidence and elasticity is key to seeing who a tax actually helps or hurts.