Ota Paper 101: A Review Of The Evidence On The Incidence Of The Corporate Income Tax - William M. Gentry (Office Of Tax Analysis, Us Department Of The Treasury) Page 20
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42five sectors and three factors of production (capital, labor and land). Of the five sectors, three
sectors face the corporate tax: (1) a sector that produces tradable goods that are perfect substitutes
with foreign goods; (2) a sector that produces tradable goods that are imperfect substitutes with
the foreign goods; and (3) a non-tradable sector. The remaining two sectors are noncorporate
with one producing tradable goods and the other producing non-tradable goods. All five sectors
in both countries have production functions with constant returns to scale and markets are
assumed to be perfectly competitive.
In general equilibrium models, predictions depend critically on assumptions about factor
mobility and the variability of factor supplies. Randolph starts with the traditional assumption
that capital is perfectly mobile across sectors within a country and across countries. Labor is
mobile across sectors within a country but cannot move across jurisdictions. In the aggregate,
capital is in fixed worldwide supply. Labor supply is in fixed supply within each country. These
assumptions are critical since factor mobility, supply elasticities, and the relative capital
intensities of different sectors drive the price changes that determine the burdens of the tax. One
justification for assuming that factors are mobile is that the models are predicting the long-term
effects of tax policy, rather than short-term effects.
Randolph focuses on a model in which the US has a corporate tax and the foreign country
does not. One can interpret the results as the incidence of the difference between the US
corporate income tax rate and the foreign corporate tax rate. Moreover, the predictions of the
model apply to a change in US tax policy holding the tax regimes in other countries as fixed so
the main results of the paper ignore the possible effects of tax competition among countries or
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other forms of interdependency between countries’ corporate tax systems.
An alternative
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Randolph discusses the interaction between increased capital mobility and tax competition over the last 25 years.
Below, I discuss the implications of tax competition for corporate tax incidence.
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