Tax Incidence with Three Goods and Two Primary Factors: Theory and Applications
A three-good-two-primary-factor (3x2) general equilibrium model, along with parallel numerical illustrations, is developed to analyze the incidence and welfare cost of several taxes. The approach, blending theory and computed examples, enriches some well-known tax models and provides more insights than either the text-book two-by-two treatments or purely numerical models in areas such as environmental taxation and value-added tax (vat). It is ideal for considering factor taxes in intermediate-good industries (e.g., profit- and payroll taxes in mining industries) which are widely used but not much discussed in the literature. Their incidence, generally, turns out to be very different from similar taxes in final-good industries. A stylized application incorporating zero-rating and exemptions, two key features of the vat system in many countries, further illustrates the usefulness of this framework.
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