Tax incidence is a bitch, or labour is not a homogeneous factor of production

Model highly paid workers (CEO-types, bonus-driven investment bankers, highly skilled professionals, etc) as a different factor of production to not-so-highly paid workers (e.g. manual labour, inexperienced workers, etc).

In light of this information, discuss the following statement:

If we raise taxes on the highest paid workers, wages will adjust so that some of the burden falls on lower paid workers (as well as consumers, capital, etc, etc.)


  1. Leigh Caldwell Says:

    Alternatively, still using the factors of production analogy: demand for the highly paid workers (let's call it the "CEO factor") may fall, increasing demand for the "manual factor".

    Essentially the price of the CEO factor has increased; the mix of factors will change as a result; and the natural consequence is to increase the price of other factors.

    This assumes that the CEO factor either withdraws labour or increases its price to compensate for the additional tax burden. Perhaps they will be generous enough not to do that.

    Interesting idea though, I may take it up here.