Passing the burden: corporate tax incidence in open economies



Ratio of wages between 2 types of labor:


Q

L1

Q

L2


(1 - a ) bL-1
(1
- b ) L-1)


Γ θθ   z1     θτθ ^(γ-θ)/θ

I aK + (1 a ) L I


Q

L2

Q

L3


(1 b ) cLY-1

(1 c ) Lβ - 1


l-                         γθ / θ                  ^^ι(β—γ ) γ

b I aKθ + (1 a ) L ]   + (1 b ) Lγ2


The effect of a change in capital on the ratio of wages between different types of labor:


(∂Q/ Ï
γ⅝L

Q/

I ∕∂L2 )
K


. a ab (1 a) (KL1)θ-1
(
γ — θ)----:

(1 b )      /


•[aKθ + (1 a)Lθθ ]


( Y~2θ )/θ


(∂Q/ ^

∕∂L 2

Q/

I ∕dL3 )
K


abc(1 b) Kθ—1LY—1

•[ aKθ + (1 a )L ] ‘γ * θ


(βγγ~C)---Lj—1-

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

b I aKθ + (1 a ) L ]   + (1 b ) Ly2

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 L
2 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.

43



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