Economic Incidence

Who Really Pays? The Hidden Truth About Taxes, Business, and Power

We have been lied to about tax. Not directly, of course. No politician stands on a stage claiming, "We will tax workers instead of businesses." Yet that is exactly what happens, every year, across the UK and much of the developed world. We pretend that businesses pay VAT, that employers pay National Insurance, that corporations pay their "fair share." In truth, economic reality laughs quietly at legal labels. The burden of taxation moves silently, invisibly, shaped by market forces, bargaining power, and supply and demand. This is economic incidence: who really pays. Understanding it matters not just for policy wonks but for business leaders, investors, and anyone who earns a wage.

At first glance, taxes seem simple. The law says who must remit the money, and that should be the end of it. A café owner collects VAT, an employer hands over payroll taxes, a company files a corporation tax return. But the economy has other ideas. Prices shift, wages adjust, profits shrink or grow. The legal taxpayer is rarely the economic one.

Take VAT. Legally, the business collects it and sends it to HMRC. Economically, the business only bears what it cannot pass on. If customers are willing to pay more, the VAT sits squarely on their shoulders. If competition is fierce and prices must stay low, the business absorbs it. Either way, workers, suppliers, and shareholders often share the load. A business may remit the tax, but the tax is borne in fragments by everyone in its ecosystem.

The difference between legal responsibility and real burden is not unique to VAT. Payroll taxes are marketed as an employer cost. Politicians can claim they are "taxing business, not people." In reality, studies show that much of these taxes is quietly shifted back to workers through lower wages. The same principle applies to corporate taxes. Research finds that a significant share of the burden is passed to employees, often disproportionately to lower-skilled workers, through slower wage growth, reduced employment opportunities, or cutbacks in training and investment.

Even property-based taxes, like business rates in the UK, demonstrate the subtlety of incidence. Short-term, the firm pays. Long-term, rents adjust, and landlords shoulder much of the cost. The firm may feel the squeeze temporarily, but over time landlords and consumers absorb the tax.

Economic incidence is determined not by statute but by market power and elasticity: the relative ability of buyers and sellers to avoid paying. If demand is inelastic, customers bear most of the burden. If labour supply is inelastic, workers bear more. If capital is highly mobile, corporations can shift production to lower-tax jurisdictions. These principles are universal.

The Implications for Business

Business leaders cannot ignore tax incidence when making strategic decisions. Every pricing choice, wage negotiation, and hiring plan is filtered through taxation. VAT is not simply a line on an invoice but a cost embedded in pricing strategies. Employer National Insurance is not just a corporate expense but quietly suppresses wage growth. Corporate tax influences investment, expansion, and the ability to compete internationally.

Yet policy discussions rarely grapple with this reality. Politicians talk about taxing corporations or "making the rich pay" without acknowledging that much of the burden will shift onto workers or customers. Labour unions protest VAT hikes without recognising how businesses must absorb them. Economic incidence is invisible, and therefore politically convenient: blame can be assigned without confronting the truth.

This disconnect explains why designing effective, fair, and growth-compatible tax policy is so difficult. A successful tax system must account for economic incidence from the outset. There are several principles that, if followed, can improve fairness and efficiency.

Principles for Better Tax Policy

Let's consider how we can make taxation fairer.

Tax immobile factors of production. Land, by nature, cannot move. Taxing it through business rates or land value taxes places the burden where it is intended. In contrast, capital is mobile. Taxing it heavily encourages relocation, avoidance, or reduced investment. A corporation may appear to pay, but globally mobile production shifts the real burden onto workers, suppliers, and sometimes consumers.

Target rent-seeking rather than productive activity. Profit derived from economic rents (monopoly advantage, scarce resources, intellectual property) can be taxed with less distortion than wages or investment. Misguided tax policy that hits productive work, such as payroll taxes or high marginal corporate rates, suppresses productivity and growth. Workers bear the cost in slower wage progression, reduced employment, and diminished opportunities for skill development.

Prioritise transparency. Stealth taxes are unfair by design. Employer National Insurance, compliance costs, and hidden levies may appear to fall on businesses, but they are in reality borne by workers or passed through prices. Clear, transparent taxation improves fairness and enables better decision-making. When employees understand their true tax burden, they can make informed choices about compensation and career decisions. When business owners know the real cost of operating under a given tax regime, they can plan effectively.

Minimise economic distortion. High taxes on investment, innovation, or expansion discourage productive activity and reduce economic growth, which ultimately affects workers and consumers. The most efficient taxes are those that capture revenue without significantly altering economic behaviour. That is why taxes on immobile resources or luxury consumption often outperform blanket income or payroll levies.

Keep it simple. Complexity in taxation shifts the burden to those who cannot afford sophisticated advice: typically smaller firms and lower-income workers. Large multinational firms can hire armies of accountants to minimise liability, whilst smaller companies absorb compliance costs, inefficiencies, and mistakes. Simple systems reduce hidden incidence and make the economy fairer and more predictable.

Strategic Implications

Understanding these principles is crucial for business strategy. Pricing decisions are inseparable from tax strategy. Firms with strong brand power or limited competition can shift taxes to customers, whilst commodity-focused businesses absorb more of the burden. A small retailer competing with national chains may find VAT and compliance costs eating into margins, whilst Apple or Tesco passes it seamlessly onto consumers. The capacity to shift tax is a competitive weapon.

Labour costs must be considered holistically. Employer National Insurance and other payroll-related taxes are part of the total employment cost. Ignoring these hidden burdens leads to mispriced labour decisions, underinvestment in staff, and long-term competitive disadvantage. Savvy business owners plan hiring and compensation strategies with tax incidence in mind, not just statutory obligations.

Location and investment decisions are equally affected. In a globalised economy, corporations can relocate production to low-tax jurisdictions. Economic incidence studies show that in these cases, much of the burden intended to fall on corporations is instead shifted to workers through lower wages or reduced hiring. Understanding where real tax costs land allows businesses to make informed decisions about expansion, outsourcing, and investment.

What This Means for Workers

For workers, the implications are no less profound. Take-home pay is the true measure of the tax burden. Even if statutory taxes appear low, hidden burdens erode wages. Employer contributions, corporate taxation effects, and price pass-throughs all reduce disposable income. Wage stagnation, reduced benefits, and shrinking investment in workforce development are frequently the invisible consequences of a system designed without accounting for incidence.

The politics surrounding taxation compounds the problem. Every party claims to champion fairness, yet almost no discussion addresses who actually pays. Slogans like "corporations must pay their fair share" or "tax the rich" obscure reality. Business owners absorb compliance costs, workers bear the brunt of payroll taxes, and consumers ultimately pay for VAT and excise levies. Economic incidence is politically inconvenient because it undermines narratives of blame. Yet ignoring it produces inefficiencies, mispriced labour, and strategic errors across industries.

UK Examples

The UK provides clear examples. VAT, currently at 20 per cent, is ostensibly paid by businesses but largely borne by consumers, with small firms often suffering compliance burdens more acutely than large corporations. Employer National Insurance, presented as a cost of doing business, suppresses wages and disproportionately affects lower-skilled workers. Business rates squeeze high street retailers whilst landlords bear part of the load over time. Corporate taxation, despite headlines about "soaring profits" or "tax avoidance," ultimately depresses investment and employee compensation. These mechanisms are neither conspiratorial nor accidental but the natural outcome of market responses to legal tax assignments.

Internationally, the same principles apply. In the United States, payroll taxes and corporate taxes also shift towards workers. In European countries with high VAT, businesses may legally remit taxes but strategically price to ensure economic incidence lands on consumers. Countries with mobile capital experience intensified incidence effects, as globalisation allows corporations to shift production to lower-tax environments. The lesson for business leaders is universal: statutory obligations do not define economic reality.

The Path Forward

Policy designers and business strategists alike would do well to internalise these truths. Tax policy without consideration of incidence is almost certain to produce unintended consequences. Firms that understand hidden burdens can optimise pricing, investment, and labour strategies. Workers who recognise invisible taxes can better understand take-home pay and real wage growth. Governments that acknowledge incidence can design fairer, more efficient systems that actually hit intended targets without distorting economic behaviour.

The challenge of economic incidence is not simply a technical problem but a question of honesty, efficiency, and power. Who should pay taxes? The naive answer is obvious: the law says so. The practical answer is more complicated: markets, bargaining power, and mobility decide. Fairness requires recognising that truth and designing systems around it. Until then, we will continue to argue about statutory tax liability whilst the real burdens silently migrate.

The stakes are real. Every pricing decision, hiring plan, wage negotiation, and investment choice is shaped by economic incidence. Every business owner, investor, and worker who ignores it does so at their peril. Taxes are not abstract numbers but forces in motion, reshaping the economy in ways both visible and hidden. Understanding who really pays is not just accounting but strategy, policy, and survival.

We have been pretending to tax corporations, businesses, and landlords. We have been pretending that employees are unaffected. We have been pretending that VAT is simply a paperwork exercise. The truth is inconvenient, complex, and often invisible: the burden of taxation does not respect the law, only the market. For business leaders, recognising that reality is essential.

And for policymakers, the lesson is equally stark: you cannot design fair taxes without first acknowledging economic incidence. Pretending otherwise does more than mislead the public but undermines economic efficiency, strategic planning, and fairness itself. If a tax system is judged by who legally writes the cheque, it will always fail. If it is judged by who actually pays, it can succeed.

Economic incidence is the hidden story behind every price, every wage, every corporate decision. It is invisible, unglamorous, and politically inconvenient. Yet it is also one of the most important factors in understanding how modern economies work. To ignore it is to operate in denial. To acknowledge it is to see the world as it is: a market where taxes are not paid by law but by reality.

And reality, as every business leader knows, is the only thing that matters.