Specific Inputs,Value-Added,and Production Linkages in Tax-Incidence Theory

Abstract

Factors of production that cannot be moved from one activity to another due to their intrinsic nature, location preferences, mobility restrictions, or licensing requirements were featured prominently in the tax literature of the 1970s. Immobile factors, however, often produce inputs for other sectors. Several examples of this type that enhance and enrich some well-known existing models are presented. The value-adding process and cross-sector connections are explicitly specified. The new tax-incidence results often resemble those in mobile-factors-only (mfo) models in spite of one or more sector-specific inputs. Numerical examples, based on stylized U.S. data, illustrate the results and highlight the difficulties that arise in defining equivalent specifications. Goods mobility offsets some effects of factor immobility, but the computed tax elasticities are rarely the same as in mfo models. The Marshallian short-run/long-run distinction, blurred somewhat by production linkages, does not disappear.

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