A SIMPLIFIED EXPOSITION OF THE HARBERGER MODEL I: TAX INCIDENCE

Abstract
Our objective in this two-part set of papers is to provide a clear and easily comprehensible illustration of tax and expenditure incidence using a special case of the Harberger model. The special case is a world in which both production and aggregate consumption behavior can be adequately described by Cobb-Douglas functions. This set of assumptions has the appealing virtue of allowing us to examine general equilibrium adjustments to taxes and fiscal spending in a sequential rather than simultaneous fashion. We are able, therefore, to manipulate a numerical model of an economy in a way that can be readily followed by those who are unfamiliar with, or even frightened by, the differential calculus involved in the usual presentation of the Harberger model. Since our aim is pedagogical we present no new analytical results but, instead, try to disseminate established ones to a wider readership. In analyzing a tax on capital income in one sector, a tax on all capital income, and selective and general commodity taxes, we focus on how a tax affects both the sources and uses sides of income for each of the groups labor, capital and government, and in some cases creates excess burdens. Finally, we show that incidence is independent of absolute changes in price level; only relative price changes have any bearing on the incidence question. In a second paper in this series we undertake the analogous exposition of the incidence of various expenditure policies.