Tax Incidence
Plain definition
Tax incidence is the actual division of a tax's economic burden between buyers and sellers — who really pays, regardless of who physically hands the money to the government. It is determined by relative elasticities: the less elastic side bears the larger share.
In economics
Statutory incidence (who remits the tax) is nearly irrelevant; economic incidence is what matters. A tax on sellers shifts supply up by the tax, but price rises by less than the full tax when demand has any elasticity. This is why payroll taxes nominally on employers largely come out of workers' wages — labor supply is less elastic than labor demand.
Example
A 10-rupee cigarette tax is levied on shops. Because smokers' demand is inelastic relative to supply, the retail price rises by about 8 rupees while the shop's net receipt falls only 2 — buyers bear most of the tax even though sellers write the cheque to the government.
The persistent myth is that whoever is legally charged with paying the tax bears its burden. Economic incidence depends on elasticities, not statutes: a tax on producers is largely passed to consumers when demand is inelastic, and a tax on consumers is largely absorbed by producers when supply is inelastic. Follow the elasticity, not the paperwork.