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

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.