General equilibrium incidence analysis: The Harberger model after ten years

This survey paper summarizes and appraises the Harberger model of tax incidence and its extensions, modifications, and applications. It considers the shortcomings of Marshallian partial equilibrium incidence analysis and early efforts to overcome them, exposits a late vintage version of the Harberger model, explains how this relatively simple general equilibrium model overcomes many of the shortcomings of earlier analysis, and describes several existing and potential modifications and applications and several inherent shortcomings of the model. It concludes that Harberger performed an invaluable service in providing public finance economists with an easily manageable general equilibrium incidence model.     

A general equilibrium model of the incidence of corporation income tax under uncertainty

In this paper we investigate the incidence of the corporation income tax in terms of a two-sector, general equilibrium model, where production decisions are made under uncertainty. The conventional result, derived originally by Harberger (1962), is that if the corporate sector is the capital-intensive sector, then capital must bear a greater burden of the tax, in proportion to its initial share in national income, than labor. This result continues to hold unambiguously under uncertainty only if the relative and the absolute risk aversion of the corporations are non- increasing in profits. Otherwise, the Harberger result may not hold.     

Generalized tax incidence results using the Harberger model with three factors

The Harberger (1962) model of corporate tax incidence, utilising a two-sector, two-factor, general equilibrium framework and Mieszkowski's (1967) extension yielded several interesting results on equivalences among general taxes as well as differential incidence of partial taxes. This paper reports on the generality of these theorems in the presence of a third factor. Not surprisingly, many results will be dependent upon the relative magnitudes of partial factor elasticities of substitution and sectoral factor ratios. Emphasis is given to an intuitive explanation of these dependencies.     

Income tax incidence in a developing country: The case of Greece

The objective of this study is to throw some light on the question of direct tax incidence in a developing country like Greece. A two-sector model is built up which emphasises a number of duality aspects. In that respect the model deviates from the standard Harberger type models. Appropriate shifting formulas are then constructed. Making use of a set of plausible parameter values our findings suggest that the taxed input may avoid some portion of the tax burden even under a perfectly competitive environment.     

A decomposition of the Harberger expression for tax incidence

In this paper we propose a decomposition of the Harberger expression for the incidence of the corporate income tax into ‘commodity price distortion’ and ‘factor price distortion’ effects. By applying Harberger's estimates of the parameters for the U.S. economy, we will demonstrate that the factor price distortion effect, which has an extremely simple formal expression, explains 115 percent of the total effect of the tax change on the rate of return. This suggests that the commodity price distortion effect may be relatively unimportant in explaining the tax incidence. The difference between our two effects and Mieszkowski's (1967) output and factor substitution effects is also noted.     

Tax Incidence in a Model with Efficiency Wages and Unemployment

Abstract

The purpose of the present paper is to examine the effects of taxation on income distribution in a model with efficiency wages and involuntary unemployment. Central to our efficiency-wage model is the hypothesis that firms set wages above market-clearing levels, whenever the productivity of labor depends on the real wage paid by the firm, and unemployment. Within a two sector general equilibrium model we study the incidence of factor and commodity taxes on income distribution, and unemployment. Our findings differ substantially from those derived by the traditional neoclassical analysis, originally developed by Harberger, and as it has been extended by several authors.     

Shadow pricing of labour and capital in an economy with unemployed labour

This paper derives the shadow prices of labour and capital to be used in the public sector in a situation of unemployment. The setting considered is that of a three-good, two-period general equilibrium model. Then shadow prices are compared to their corresponding market prices and shown to closely depend on own and cross-elasticities of supply and demand for labour and investment. In the first part, a rigid wage rate is the sole source of distortion; then, a tax on capital income is introduced so that our formula for the social rate of discount can be contrasted with that of Harberger, Sandmo and Drèze.     

Tax incidence in a two good model

In a two consumer, two commodity economy with an excise tax on one good, analysis is done of the effects of lump sum transfers between consumers and of an increase in the excise tax, proceeds being returned as a lump sum. Changes in price, incomes, and utilities are calculated in terms of demand and supply derivatives and changes in profit shares going to the two consumers. Analysis complements that of Harberger by concentrating on the demand side and considering only a reduced form of supply responses. Some of the analysis parallels consideration of the classical transfer problem in international trade.     

Employer payroll taxes and money wage behaviour

In the past ten years tax incidence theory has made a number of strides. Terminology has become standardized, assumptions have been made explicit, and a two sector, two factor, I static general equilibrium model to study incidence questions has been developed and elaborated. Rather than review these developments in any detail, it is sufficient here to note a sampling of these writings, namely the works of MUSGRAVE (1959, Ch. 10), HARBERGER (1962), MIESZKOWSKI (1967), MCLURE (1971) and MEISZKOWSKI'S (1969) summary of this litera-ture. ^{1 1} The models under consideration are essentially short run in nature. For present purposes the works of KRZYZANIAK (1968, 1970) on long run incidence are not being considered. View all notes

A central theme in this literature has been to emphasize the importance of relative price changes in the determination of tax incidence. At the same time it plays down the importance of the direction of shifting (forward or backward) which had been a prominent feature of earlier partial equilibrium incidence analysis. One purpose of the present paper is to argue that in actual empirical situations it is necessary to consider the behaviour of absolute prices in determining the incidence of a specific tax, the employer payroll tax.

There are four parts to the paper. Part I reviews the general equilibrium model and its conclusions on payroll tax incidence. The implications of forward shifting, backward shifting and payment of payroll taxes by employers are discussed in Part II. Results of a test for back-ward shifting of the tax in US manufacturing are reported in Part III. Part IV contains conclusions.

Two conclusions emerge from the analysis. (I) In the general equilibrium models under consideration the employer payroll tax is borne by labour. However, care must be taken in applying this conclusion to a real world situation where transfer payments are a component of family income. (2) Empirical tests in US manufacturing do not support the idea that the I employer tax is shifted totally backward onto money wages.     

Corporate taxation and the optimal investment decisions of firms

The effects of a corporate profits tax on the choice of technique depends on the criterion used to make this choice. Harberger concluded that it would alter the optimal techniques because he was implicitly assuming that firms try to maximise the internal rate of return on their investment. Stiglitz, using the maximisation of present value criterion, with a rate of interest lower than the rate of profits, concluded that the optimal techniques would not be affected by this tax. The appropriate criterion depends on the assumptions made about the scope for entrepreneurial activity and its relation to capital.     

A general disequilibrium model of tax incidence

This paper applies a general disequilibrium approach to the tax incidence problem. Separate sections have examined the incedence of various taxes in an economy experiencing general excess demand and excess supply. The specific inclusion of these disequilibrium elements leads to some results markedly different from those obtained in an equilibrium model. The tax incidence is measured by the labor-capital ratio rather than by the familiar wage-rental ratio. The incidence of a partial factor tax can easily and definitely be shown to fall in a greater proportion on the taxed factor than on the untaxed one.     

Labor or consumption taxes? An application with a dynamic general equilibrium model with heterogeneous agents

This study analyzes the effects of tax reform that shifts tax burden from labor to consumption. In this context, I also deal with the issue of progressivity. Even though this kind of tax policy change has recently gained popularity, its positive effects are debatable while the offsetting effect of a consumption tax on labor supply makes the net output change rather ambiguous. I examine these effects using a dynamic general equilibrium model with heterogeneous agents. The model is calibrated to fit certain characteristics of the Finnish economy. In addition to output and employment effects, I study the tax reform's effect on income and wealth distribution. First, I find that eliminating progressivity in labor taxation increases output via increase in capital accumulation that comes, however, in expense of slightly more inequality. Then, tax reform that replaces progressive labor taxes with a flat-rate consumption tax leads to a significant rise in capital accumulation, a negligible change in labor supply and gross labor income distribution, but a relatively considerable increase in wealth concentration.     

A general equilibrium analysis of property tax incidence

Mieszkowski's (1972) analysis of the ‘new view’ of property tax incidence dealt with a model of an economy containing only one sector and three factors, in which labor was immobile. Brueckner (1981) incorporated an equal utility condition into his general equilibrium analysis of property tax incidence to take worker mobility into account. His model, however, did not have capital as an input factor and the benefits of public expenditure were ignored. This paper extends previous research by using a general equilibrium model of an economy with two sectors, three factors, and multiple communities. Both capital and labor are assumed to be mobile and Brueckner's labor mobility condition is modified to include public expenditure effects. While the results of the analysis support the ‘new view’, they qualify the original Mieszkowski studies in many aspects. The model also sheds light on tax incidence in no-tax communities, which was often ignored in earlier studies.     

On the marginal excess burden of taxation in an overlapping generations model

We extend marginal excess burden (MEB) analysis in public finance literature to a dynamic general equilibrium model with incomplete markets and heterogeneous households. This extension allows us to quantitatively assess efficiency ranking and incidence of taxes. Our results indicate a disparity in welfare cost and distributional consequence of different forms of taxation on capital, labor and consumption. According to our MEB ranking, capital income taxation appears to be least efficient as it results in larger marginal excess burdens, compared to labor income tax and consumption tax. The tax incidence analysis shows variation of tax burdens across households, depending on their age, income type and generation. In particular, older households with higher income bear the highest burden of company income tax; meanwhile, future born households bear the highest burden of personal income tax. Hence, our MEB analysis demonstrates a fruitful approach to better understanding efficiency and incidence of tax reforms in one unified framework.     

Integrating Tax Distortions and Externality Theory

Tax distortions are interpreted as fiscal externalities. By purchasing a taxed commodity, the individual generates tax revenue that is a benefit external to the purchaser. Behaving noncooperatively, the individual chooses a quantity that is less than the efficient level. The excess burden is interpreted as the benefit of choosing quantities cooperatively. The analysis clarifies the difference between the marginal cost of funds and the marginal excess burden, and explains the presence of compensated demands in the Harberger Triangle, in the Index of Discouragement, and in the Ramsey Equations.     

Non-profit-maximizing behavior and the short-run incidence of the corporation income tax

This paper presents a two-sector, general equilibrium model in which firms in one sector are imperfectly competitive non-profit-maximizers. The model is used to examine the incidence of a profits tax on the non-profit-maximizing firms. A crucial factor in the analysis is that the tax falls on both pure profits and normal profits. The paper shows that the possibility of significant forward shifting of such a profits tax is less likely than previous analyses suggest.     

Optimal Export Taxes, Welfare, Industry Concentration, and Firm Size: A General Equilibrium Analysis

By using an imperfect-competition model, it is shown that an export tax, optimal in partial equilibrium, is upwardly biased and may not be optimal in a general equilibrium setting with free entry/exit. It is shown also that the export tax has an ambiguous impact on firm size. The results of an applied general equilibrium model for the Turkish economy suggest that the export tax estimated with the PE formula is larger by a small factor than the computed export tax. However, the export tax leads to an increase in firm size and, most importantly, to a social welfare loss.     

The two-part instrument in a second-best world

Standard Pigovian tax theory has been extended in two directions. First, many polluting activities are difficult to tax because they are not market transactions, and so recent papers have shown that the same effects can be achieved by use of a two-part instrument (2PI): a tax on output or income and a subsidy for clean alternatives to pollution. It is a generalization of a deposit–refund system (DRS). Second, a different literature concerns the second-best pollution tax in the presence of other tax distortions. Here, we combine the two extensions by looking at the second-best 2PI. When government needs revenue, is the deposit larger and the rebate smaller? We find explicit solutions for each tax and subsidy in a general equilibrium model with other tax distortions, and we compare these to the rates in a first-best model. The tax–subsidy combination is explained in terms of a tax effect, an environmental effect and a revenue effect. The model allows for flexible interpretation to show various applications of the 2PI. We also discuss important caveats.     

IMPACT OF TAX, TRANSFER, AND EXPENDITURE POLICIES OF GOVERNMENT ON THE DISTRIBUTION OF PERSONAL INCOME IN CANADA

This is a study of the first order incidence of government taxation and expenditure policies on the incomes of families and unattached individuals in Canada in 1970. The specific purposes of the study are twofold. The first is to estimate for calendar year 1970 the first order incidence of governments'actual tax, transfer, and expenditure policies on spending units. The second objective is to simulate the changes in this incidence that would have occurred in 1970 if the new federal personal income tax, unemployment insurance, old age sccurity and family allowance programs had been in operation during that year. The methodology is similar to that used by W. Irwin Gillespie in his pioneering 1964 study for the Royal Commission on Taxation.
It is concluded that the 1970 incidence of the combined tax and transfer programs of all levels of government is broadly redistributive, with net incidence of federal government programs being considerably more redistributive than that of provincial and local governments. In general, the public sector provides large net benefits to families and individuals with incomes of less than $4,000, declining net benefits to families earning from $4,000 to $11,000 and levies small but increasing levels of net tax on families and individuals with incomes in excess of $11,000. This general conclusion is relatively insensitive to the precise assumptions made about the shifting of taxes and the distribution of expenditures on pure public goods. From simulation experiments, recent reforms of the federal income tax, unemployment insurance, old age security and family allowance systems were estimated to increase the amount of redistribution from the rich to the poor.     

Possibilities for the exportation of production taxes: A general equilibrium analysis

This paper re-evaluates previous discussions of inter-regional tax incidence and tax exportation. A two region general equilibrium model is developed that allows for inter-regional capital mobility and explicit commodity price determination, where one of the two regions is incompletely specialized. Conditions are determined under which either region will be able to export a production tax. Also, the link between tax exportation and the welfare of the taxing region is analyzed. In the case where taxes are not equal to zero initially, tax exportation may be inadvisable even when it is possible.