Passing the burden: corporate tax incidence in open economies

of the tax. They estimate, however, that the deadweight loss created by corporate taxes is more
than 100 percent of corporate tax revenue.

2.2 The Effect of Openness on Wages

Labor and international trade economists have devoted much energy and research to
understanding the effect of economic openness on wages. Using the fundamentals they have
developed will allow me to integrate the effect of openness on wages with the incidence of
corporate taxation. The Hecksher-Ohlin model predicts that countries will tend to export goods
and services whose production uses relatively intensely their comparatively abundant factor.
Most developed countries have a relatively large endowment of capital compared to the rest of
the world; therefore, the comparative advantage of most developed countries lies in capital
intensive goods and services.² Thus, as the economy opens, these countries will shift production
toward capital intensive industries. Factor price equalization predicts under strong assumptions
that wages and the return to capital will equalize across countries over time with free trade. This
result requires countries to possess identical technology and assumes that capital and labor are
mobile within country but immobile between countries.³ In addition, capital to labor ratios must
be sufficiently similar across countries so that all countries will produce tradable goods
employing both factors (i.e., production occurs in the cone of diversification). If factor price
equalization or the weaker condition of factor price convergence holds, wages will fall in
developed countries as more emphasis is put on capital-intensive industries. In my model, capital
is internationally mobile; this assumption guarantees that every country will be in the cone of
diversification if there are no impediments to trade, and thus, factor price equalization will hold.

<<   4   5   6   7   8   9   10   >>

More intriguing information