The burden of a tax finally rests on the incidence of taxation. This refers to the ultimate economic impact of a tax, which can either be borne by the person or entity that is legally responsible for paying the tax (the tax object), or it can be passed on to someone else in the form of higher prices or reduced profits (the tax incidence).
For example, if a government imposes a tax on cigarettes, the legal responsibility for paying the tax falls on the cigarette manufacturers or importers (the tax object). However, the ultimate burden of the tax may be passed on to the consumers in the form of higher prices for cigarettes, which means that the incidence of the tax falls on the consumers.
The incidence of taxation is an important concept because it helps us understand who is actually bearing the economic burden of a tax. It can also help policymakers design tax policies that are more equitable and efficient.