Passing the burden: corporate tax incidence in open economies

abc(1 — b) K^θ—1LY^—1

(^β—^γγ~C)---Lj—1-

-,_{γ / θ}                   -|( β —2 Y )/ Y

b I aK^θ + (1 — a ) L ]   + (1 — b ) L^y₂

Ifβ= Y=θ, a change in capital will not affect the ratio of wages between skill types. Thus,
wages across skill will be affected similarly by a change in the corporate tax rate.

Ifβ> Y>θ, a change in capital increases the ratio of wages between L1 and L2 and the ratio
of wages between L2 and L3. If L1 is high-skill labor, L2 is middle-skill labor and L3 is low-
skill labor and the capital-skill complementarity hypothesis holds, a change in capital should
have the largest effect on high-skill labor. Thus, a change in the corporate tax rate is
predicted to have the largest impact on the wages of high-skill workers.

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