Technical Appendix for Measuring the Burden of the Corporate Income Tax under Imperfect Competition

TECHNICAL APPENDIX FOR MEASURING THE BURDEN OF THE CORPORATE INCOME TAX UNDER IMPERFECT COMPETITION APPENDIX A: THEORY In this section we first summarize the Davidson and Martin (1985) (DM) model of the incidence of the corporate income tax under imperfect competition and then derive a comparative static result that describes how the degree of imperfect competition affects the incidence of the corporate income tax. The comparative static result presented in the last section suggests that the wage elasticity with respect to the corporate tax is an increasing function of the industry concentration level. A1. Partial Equilibrium in the Corporate Sector Suppose that there are I industries in the economy. Each industry has a corporate (imperfectly competitive) sector and a non-corporate (competitive) sector. The corporate sector has N firms. The corporate group plays a repeated game in which each firm produces constrained quantities of a single good X under constant cost. Constrained production maximizes the joint profit in the corporate sector subject to no cheating. If any firm cheats by producing a higher quantity at time t, every firm will revert permanently to the Nash output level. Each firm compares the current gain from cheating to the present value of profit loss by permanently producing at a lower output level. The net gains from cheating (Z) are