A welfare theoretic approach to tax incidence

Abstract

This dissertation examines several welfare effects of (1) an intracountry transfer payment and (2) a tax on corporate capital. While both topics are concerned with tax incidence, the analysis of each are even more closely related here. By examining the demand side, this dissertation complements and extends the traditional analysis of tax incidence in both areas. The first part of the dissertation examines the welfare effects of an intracountry transfer payment with in a two-consumer, two-commodity economy. In the traditional analysis of transfer payments, it is assumed that a transfer is one-for-one. In other words, the recipient of the transfer receives what the transferer gives up. This dissertation shows that if an excise tax is present and the government balances its budget, the transfer is not one-for-one if the two consumers possess different marginal propensities to consume the taxed commodity. Moreover, it is shown that such a transfer has the following welfare effects. First, in a closed economy, the transfer improves the welfare of the recipient and lowers the welfare of the transferer. Second, in an open economy, the transfer can lower the welfare of the recipient and raise the welfare of the transferer even if the foreign offer curve is elastic. This result contrasts with the conclusion of Johnson [1960] that an inelastic foreign offer curve is a necessary condition for these perverse results. The second and most important part of this dissertation examines the income and welfare effects of a tax on corporate capital. The standard two-sector model is used and the economy is partitioned into two groups according to factor ownership: labor, which owns no capital, and capital, which performs no work...