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
... [Show full abstract] 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.