Tax incidence in a growing economy with a variable savings rate

Tax incidence theory emphasizes that the burden of a specific factor tax is shared by other factors of production. Thus, a tax on labor will reduce the quantity of labor hired, increase the capital-to-labor ratio, and reduce interest rates. That is, owners of capital will share the tax burden, depending upon the relative supply and demand elasticities of the factors of production. However, it has been previously shown that labor will bear the entire burden (100 percent) of a wage tax in an overlapping generations model. The present study provides a less restrictive and more plausible model and then derives several circumstances under which labor bears either more or less than 100 percent of the tax burden.