CORPORATE TAX INCIDENCE AND INEFFICIENCY WHEN CORPORATE AND NONCORPORATE GOODS ARE CLOSE SUBSTITUTES

Abstract

An important deficiency in Harberger's [1962] model of corporate income taxation is its inability to consider both corporate and noncorporate production of the same good. Within‐industry substitution has potentially major implications for both the excess burden and incidence of the corporate tax. We analyze this within‐industry substitution using a model in which each industry/sector contains corporate and noncorporate firms (with identical production functions) which produce goods that are close substitutes. The scope for considerable within‐industry substitution of noncorporate for corporate capital leads to a very much larger excess burden than that in the Harberger model.

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