Invariant Resource Supply and Tax Incidence in a Lifecycle Growth Model

Abstract

The incidences of wage, income, interest, output, and expenditure taxes are examined in a dynamic general equilibrium growth model. It is shown that a flat-rate income tax and a general sales tax have the same incidence; if the production function is Cobb-Douglas (unit elasticity of substitution), both are borne entirely by labor income. Feldstein's finding that a proportional capital income tax is partly shifted onto labor income is shown to hold even when saving elasticities are zero. A proportional wage tax reduces after tax wage income by more than the tax, while increasing interest income, demonstrating that labor bears more than a 100% share of this tax's burden. These results are compared to the incidence results of static general equilibrium analysis. It is shown that the general equilibrium results hold in the long run only if the production elasticity of substitution is infinite.

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