Saving and Tax Incidence Revisited

The IUP Journal of Public Finance, Vol. VIII, No. 3, pp. 26-35, August 2010

Posted: 2 Sep 2010

See all articles by Richard D. McGrath

Richard D. McGrath

Armstrong Atlantic State University

Richard J. Cebula

Armstrong Atlantic State University; Jacksonville University (Florida)

Date Written: September 1, 2010

Abstract

Traditional tax incidence theory emphasizes that the burden of a specific factor tax is shared by other factors of production. For example, a tax imposed on labor will reduce the quantity of labor hired, increase the capital-to-labor ratio, and reduce interest rates. Thus, owners of capital will share the burden of the tax, depending upon the relative supply elasticity and demand elasticity of these two factors of production. However, it has been previously shown that labor would bear the entire burden, i.e., 100% of a wage tax in an ‘overlapping generations’ model. The present analysis provides a less restrictive and more plausible model than heretofore has been considered in this literature and then derives several conditions under which labor bears either more or less than 100% of the tax burden.

Suggested Citation

McGrath, Richard D. and Cebula, Richard J., Saving and Tax Incidence Revisited (September 1, 2010). The IUP Journal of Public Finance, Vol. VIII, No. 3, pp. 26-35, August 2010. Available at SSRN: https://ssrn.com/abstract=1669952

Richard D. McGrath (Contact Author)

Armstrong Atlantic State University ( email )

Savannah
Georgia
United States

Richard J. Cebula

Armstrong Atlantic State University ( email )

11935 Abercorn Street
Savannah, GA 31419
912-921-3781 (Phone)
912-921-3782 (Fax)

Jacksonville University (Florida) ( email )

Jacksonville, FL 32211
United States

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