The Influence of Real Income Changes on the Incidence of a Partial Factor Tax

Abstract

Imposition of a partial factor tax (the most common example of which is a corporation income tax) will impose an excess burden on society. That excess burden implies a reduction in consumers' real income above and beyond the tax transfer to the government. The incidence of the tax depends, in part, on the way consumers react to that real income loss. In this paper we show that omission of this effect, as occurs in the well-known Harberger model, will bias results toward the conclusion that capitalists bear the tax burden when the corporate sector is labor intensive.