TAX INCIDENCE WITH VARIABLE LABOR SUPPLY

Using a dynamic optimization model in which the rate of time preferenc e is endogenously determined by a household's aggregate utility, it is demonstrated that variability in labor supply has a significant effec t on the long-run incidence of a capital income tax. It is demonstrate d that if there is a marginal increase in the capital income tax rate, the tax burden is shared in some proportion by both capital and labor with capital's share of the tax burden increasing with increasing ela sticity of labor supply. This is in contrast with earlier results that showed that the elasticity of labor supply has no effect on the long- run incidence of a factor tax.