If the supply of capital is perfectly elastic, the incidence of a tax on capital income is

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Quizplus · Accepted Answer

When the supply of capital is perfectly elastic, it means that suppliers of capital are willing to supply any amount at a given rate of return. Therefore, if a tax is imposed on capital income, firms that demand capital will bear the entire burden of the tax because the suppliers can easily redirect their capital to other markets or uses without loss, leaving the demand side to absorb the tax costs.

If the Supply of Capital Is Perfectly Elastic, the Incidence