Economic Incidence of Levies

Economic incidence identifies the person whose real income ultimately falls because of a levy, regardless of who formally pays or remits it. This differs from statutory incidence, which merely identifies the legally liable payer. A transaction charge may therefore be remitted by a merchant or platform but ultimately borne by consumers, merchants, workers, suppliers, or a combination of them.

How the burden is transmitted

The initial payer may pass the charge forward through higher prices or backward through lower payments to suppliers and other input owners. If the charge is absorbed from profit margins, the merchant or platform bears more of it.

• A separately displayed surcharge makes consumer payment visible, but an embedded charge can produce the same economic burden through a higher final price.
• If merchants charge a common price across payment modes, part of the burden may be spread across customers who do not use the charged mode.

Role of demand and supply elasticity

In a competitive market, the side that is less responsive to price changes generally bears more of the charge. Thus, relatively inelastic demand permits greater pass-through to consumers, while relatively inelastic supply leaves more burden on sellers.

• Consumers bear more when substitutes are limited or switching is difficult.
• Merchants bear more when competition prevents price increases or customers can easily change sellers or payment methods.
• Incidence may change over time because elasticities are usually greater when participants have more time to adjust.

Other determinants and distributional effects

Market power, contract terms, charge design, exemptions, transaction size, and availability of alternatives also shape incidence. In platform markets, pricing across different participant groups can redistribute the burden beyond the party on whom the charge is imposed.

• A fixed charge forms a larger proportion of a small transaction than of a large one, potentially discouraging low-value transactions.
• Exemptions can protect selected users, but the unrecovered cost may be shifted through other prices or fees.
• For inclusive growth, assessment must consider both the final monetary burden and any reduction in access to affordable formal transactions.