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Tax Incidence With Variable Labor Supply

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  • Muhammad Q. Islam

    (Saint Louis University)

Abstract

Using a dynamic optimization model in which the rate of time preference is endogenously determined by a household's aggregate utility, it is demonstrated that variability in labor supply has a significant effect on the long-run incidence of a capital income tax. It is demonstrated that if there is a marginal increase in the capital income tax rate, the tax burden is shared in some proportion by both capital and labor, with capital's share of the tax burden increasing with increasing elasticity of labor supply. This is in contrast with earlier results that showed that the elasticity of labor supply has no effect on the long-run incidence of a factor tax .

Suggested Citation

  • Muhammad Q. Islam, 1993. "Tax Incidence With Variable Labor Supply," Public Finance Review, , vol. 21(3), pages 322-333, July.
    • Handle: RePEc:sae:pubfin:v:21:y:1993:i:3:p:322-333
    DOI: 10.1177/109114219302100305
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    References listed on IDEAS

    as
    1. Martin Feldstein, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 505-513.
    2. Wildasin, David, 1985. "On the Analysis of Labor and Capital Income Taxation in a Growing Economy with Government Saving," Public Finance = Finances publiques, , vol. 40(1), pages 114-132.
    3. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-635, August.
    4. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
    5. Robin Boadway, 1979. "Long-run Tax Incidence: A Comparative Dynamic Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(3), pages 505-511.
    6. Laurence J. Kotlikoff & Lawrence H. Summers, 1979. "Tax Incidence in a Life Cycle Model with Variable Labor Supply," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 705-718.
    7. Epstein, Larry G., 1987. "A simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 41(1), pages 68-95, February.
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