The Long-Run Incidence of Government Policies in Open Growing Economies

Abstract

This chapter presents an analytical model and some numerical examples of a dynamic model of tax incidence in an open economy. This model is similar to the complete specialization case of the Oniki–Uzawa–Bardhan two-country, two-sector dynamic trade model but has a relaxation of the assumption of labor immobility and allows labor migration in response to wage differentials. The budget assumed for the model is always balanced, and the subsequent analysis is found to be analogous to the familiar balanced-budget incidence of the comparative static case. The basic result obtained from the model is the tendency for expansion of public economic activity financed by income taxation to be borne by labor—both foreign and domestic. This highlights the vested interest of labor in capital formation.