Suppose an identical tax is levied on capital, labor, and land. Would the tax have the same effect in each of these markets? Explain your answer

Question

What will be an ideal response?

Answer 1

The effect of the tax would depend on the relative elasticities of supply and demand for land, labor, and capital. A tax on land falls mostly on landowners because the supply of land is very inelastic (land does not have an alternative use). Since capital the supply of capital is very elastic, a tax on capital falls largely on demanders. The effect of a tax on labor will depend on whether the supply or demand for labor is more elastic. If the demand for labor is inelastic, firms will bear a higher proportion of the tax. On the other hand, if the supply of labor is inelastic, workers will bear a higher proportion of the tax. The available empirical evidence suggests that the supply of labor is less elastic than demand. As a consequence, economists believe that workers bear most of the burden of a tax on labor.