Saturday, September 5, 2015

Corporate Income Tax Incidence

Professor Daniel Shaviro of NYU has a good blog post on September 2, "Arnold Harberger's famous 1962 article on corporate tax incidence."
The simplest way to tink about the corporate income tax is to think that it is borne by capital, because corporations are more capital-intensive than non-corporate businesses (an assumption that might not be true, actually, but let's suppose it is). But Harberger makes a point I hadn't understood before reading Professor Shaviro.

Harberger's insight is that all this changes when only some capital income is being taxed--- from the capital in corporations--- and the capital-labor ratio in a business is flexible. Suppose, as in his particular model,  that non-corporate businesses are less able than corporations to substitute between capital and labor. Then when corporations switch away from capital to labor, pushing capital into the non-corporate sector, the demand for labor increases more in corporations than it falls in non-corporations. Wages rise, so workers win and capital-owners lose. But that's only because of the assumption that corporations have more flexible production, which Harberger himself later came to think was false, and which is certainly debatable.

The Incidence of the Corporation Income Tax. Arnold C. Harberger. The Journal of Political Economy, Vol. 70, No. 3. (Jun., 1962), pp. 215-240.

Harberger is my perennial choice for the Econ Nobel Prize. He's 91 now, still alive!

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