JPIL Vol 7 Issue 2 2016 - Article 3

Bret N. Bogenschneider
The „small open economy‟ model is typically given as the analytic framework for corporate tax incidence. Economists have applied the framework to justify tax policies premised on relatively high rates of labor taxation in both the United States and Europe. However, the „small open economy‟ model is extremely controversial and has been challenged on various grounds. Here, the additional criticism is developed that the „small open economy‟ model is not based on scientific methods of inquiry. An alternative theory is proposed referred to as the „small person economy‟ model, where „small persons‟ are presumed to pay labor taxes out of current earnings thereby reducing economic welfare directly. This also entails a „pass-through‟ incidence effect via reduced consumer spending in the macroeconomy causing an efficiency loss. The reformulated „small person economy‟ has significant implications for tax policy design.

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