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Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax?

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  • Gravelle Jane G

    ()
    (Congressional Research Service)

  • Smetters Kent A.

    ()
    (The Wharton School, University of Pennsylvania)

Abstract

The conventional view holds that domestic labor, not domestic capital, bears most of the long-run burden of a corporate income tax in an open economy due to the ability of capital to move across borders. This result assumes that domestic and foreign products (as well as investments) are perfect substitutes. This paper includes imperfect product substitution within a multi-sector open-economy model, and shows that much of the burden may fall on capital. To be sure, if savings falls sufficiently, much of the burden shifts to labor, but this fact also holds in a closed economy. Hence, the debate about tax incidence must focus more on the savings response and less on whether an economy is open or closed.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 6 (2006)
Issue (Month): 1 (August)
Pages: 1-44

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Handle: RePEc:bpj:bejeap:v:advances.6:y:2006:i:1:n:3

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Cited by:
  1. Zodrow, George R. & Diamond, John W., 2013. "Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model," Handbook of Computable General Equilibrium Modeling, Elsevier.
  2. Arulampalam, Wiji & Devereux, Michael P. & Maffini, Giorgia, 2010. "The Direct Incidence of Corporate Income Tax on Wages," IZA Discussion Papers 5293, Institute for the Study of Labor (IZA).
  3. Li Liu & Rosanne Altshuler, 2011. "Measuring the burden of the corporate income tax under imperfect competition," Working Papers, Oxford University Centre for Business Taxation 1105, Oxford University Centre for Business Taxation.
  4. R. Alison Felix, 2007. "Passing the burden: corporate tax incidence in open economies," Regional Research Working Paper, Federal Reserve Bank of Kansas City RRWP 07-01, Federal Reserve Bank of Kansas City.
  5. Juan Carlos Suárez Serrato & Owen Zidar, 2014. "Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms," NBER Working Papers 20289, National Bureau of Economic Research, Inc.
  6. R. Alison Felix, 2007. "The incidence of capital taxation and the magnitude of its burden," Regional Research Working Paper, Federal Reserve Bank of Kansas City RRWP 07-02, Federal Reserve Bank of Kansas City.
  7. George R. Zodrow, 2008. "The Property Tax Incidence Debate and the Mix of State and Local Finance of Local Public Expenditures," Working Papers, Oxford University Centre for Business Taxation 0801, Oxford University Centre for Business Taxation.
  8. Neumann, Rebecca & Holman, Jill & Alm, James, 2009. "Globalization and tax policy," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 20(2), pages 193-211, August.
  9. Jennifer C. Gravelle, 2011. "Incidencia del impuesto de renta a las sociedades: revisión y análisis de las estimaciones de equilibrio general," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, Universidad Externado de Colombia - Facultad de Economía, vol. 13(24), pages 153-191, January-J.

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