The income effect of taxation means that taxation reduces the disposable income of taxpayers and changes the relative income of taxpayers. The income effect of tax itself will not cause economic inefficiency, it only shows that resources are transferred from taxpayers to the government. However, the further response of taxpayers to labor, savings and investment caused by income effect will change the efficiency and situation of the economy.
The substitution effect of tax means that when a tax affects relative price or relative benefit, people choose one kind of consumption or activity to replace another.
The income effect of tax, the symmetry of "tax substitution effect" It refers to the effect of encouraging taxpayers to increase their income because government taxation reduces the disposable income of taxpayers. The substitution effect of taxation refers to the effect that government taxation changes the opportunity cost of an economic activity and makes taxpayers give up this economic activity and replace it with another economic activity.
These two effects exist simultaneously and in opposite directions in tax activities, but they will not offset each other, because their effects will be different in micro-economic activities.
Extended data:
The content of substitution effect of different taxes is different. The substitution effect of personal income tax is mainly the substitution relationship between work and leisure. If people's demand for income is flexible, when the income tax rate increases and the marginal income decreases, people may replace part of their working hours with leisure.
The substitution effect of commodity turnover tax with selective or differential tax rate is mainly the influence on the direction of commodity supply and consumption. Under the condition that the planned price including tax remains unchanged, increasing or decreasing the turnover tax rate of a particular commodity will correspondingly reduce or increase the production profit of this commodity, which may lead producers to reduce the supply of this commodity and be replaced by other commodities;
Or replace other commodities and increase the supply of this commodity. Under the condition of free price, if the demand is flexible enough to increase or decrease the tax rate of a specific commodity, so as to increase or decrease the price of this commodity accordingly, then consumers may change the direction of their consumption expenditure, and then they will indirectly affect the production direction of producers.
As for the consumption expenditure tax, the tax substitution effect is mainly manifested in the substitution relationship between consumption and savings. Because taxing the total consumption expenditure is conducive to encouraging savings, which will lead to future consumption replacing current consumption.
When a tax imposed by the state affects the relative price or benefit of a commodity or service, people choose one kind of consumption or activity to replace another.
For example, with the increase of progressive income tax rate, the marginal benefit of work is reduced, and workers choose to rest instead of part of working hours; Another example is that a consumption tax is levied on a certain commodity to raise the price, thus causing personal consumption to choose goods without tax or light tax.
The substitution effect of tax will generally hinder people's free choice of consumption or activities, which is not conducive to the supply of production factors and thus leads to inefficient or ineffective economy. Therefore, the state should try to avoid the substitution effect of some taxes in advance when formulating the tax system.
Baidu Encyclopedia-Tax Substitution Effect