Using a two-sector growth model, this paper examines the incidence of a corporation income tax. While the two-sector static model has provided a fairly precise conclusion as to the incidence of that tax, no such clear conclusion emerges from the growth model. This is because the results are quite sensitive to the precise value of the elasticity of savings with respect to the interest rate. However, one point is clear: Because a tax increase raises the price of investment goods, if savings rates are constant, capitalists must bear a smaller burden than that predicted by the static model.

Using a two-sector growth model, this paper examines the incidence of a corporation income tax. While the two-sector static model has provided a fairly precise conclusion as to the incidence of that tax, no such clear conclusion emerges from the growth model. This is because the results are quite sensitive to the precise value of the elasticity of savings with respect to the interest rate. However, one point is clear: Because a tax increase raises the price of investment goods, if savings rates are constant, capitalists must bear a smaller burden than that predicted by the static model.

A model of corporate financial policy (debt-equity ratios and dividend payout rates) is included in the Harberger general equilibrium model of incidence of the corporate income tax. Illustrative calculations of the distortions of financial policy and increases in risk premiums induced by the corporate tax are provided. Because risk premiums on corporate securities would be reduced, eliminating the corporate tax or integrating it into the personal tax would increase the income of noncorporate investors relatively more than that of investors in corporate securities, and is therefore less regressive than is commonly thought.