Saving and Tax Incidence Revisited

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