The excess burden of the corporate income tax stems from a misallocation of investment between the corporate and noncorporate sectors when the supply of savings is perfectly inelastic.

Question

Quizplus · Accepted Answer

When the supply of savings is perfectly inelastic, the burden of the corporate income tax falls entirely on the owners of capital, and there is no reduction in investment. However, there is a misallocation of investment between the corporate and noncorporate sectors, which results in economic inefficiency and reduces overall welfare. This is known as the excess burden of the corporate income tax.

The Excess Burden of the Corporate Income Tax Stems from a Misallocation