TAX INCIDENCE IN A TWO SECTOR MODEL WITH THREE FACTORS OF PRODUCTION

In the tradition of Arnold Harberger, this thesis examines incidence in a general equilibrium framework. The static, fixed factor supply two sector, two factor model is extended to include a third fully mobile factor. Factor taxes are placed on one (or more) of one sector's factors. Formulae are derived that measure changes in factor payments, resource allocation, commodity outputs, and commodity prices. These formulae combine physical factor intensities, factor income shares, production elasticities of substitution, and consumption elasticities. The third factor magnifies the role of input substitability.; Two data sets are analyzed: Harberger's 1950's data, and 1973 Treasury Data. Because tax laws distinguish between types of capital, the three factors are labor, structures, and equipment. Capital data is divided between structures and equipment by a technique developed by Jorgenson and Christensen. This is the first model to capture two distinct distortions: the heavier taxation of capital in the "corporate" sector, and the heavier taxation of structures relative to equipment.; Applying the model to Harberger's 1950's data confirms his finding that the uneven taxation of capital income burdened capital relative to labor. One new result surfaces: equipment was burdened substantially more than structures. The differential taxation of capital reduced equipment's after tax payment by approximately 40% relative to labor while reducing structures' after tax payment by approximately 20% relative to labor. Structures' burden was less because the "non-corporate" sector, which attracted capital, was dominated by structures intensive residential real estate. This study furnishes additional evidence to explain the flow of investment capital to residential real estate.; The 1973 results are similar to the 1950's. Capital was burdened more than labor; equipment was burdened more than structures. Due to smaller tax rates, the tax-induced reductions in equipment's and structures' after tax payments were approximately 18% and 12% respectively.; Recent capital tax law changes favor equipment relative to structures. This model concludes that these changes would increase equipment's after tax payment while having a negligible impact on labor's and structures' payments. Thus, this study predicts that future investment should contain a bias toward equipment relative to structures.