Three Sides of Harberger Triangles

Abstract

Introduction.Prevailing economic wisdom is highly critical of injudicious tax policies or government regulations, uncorrected externalities, unchecked monopolistic practices, and various other market failures. When economists are challenged to quantify the economic costs of associated price distortions, it is standard practice --and has been since the 1960s --to use a small number of assumptions and selected elasticities to estimate areas of the relevant "Harberger triangles." This simple and straightforward exercise has numerous applications and the virtue of producing answers rather than conjectures.Harberger triangles come in many shapes and sizes. Figure 1 offers an illustration of such a triangle for the simple case of an excise tax. Point A of Figure 1, at which the demand and supply schedules intersect, denotes market equilibrium in the absence of the tax, with quantity q 1 transacted at price p 1 . Introduction of an excise tax at rate J, payable by firms selling the commodity, shifts the supply schedule upward by J. At the new market equilibrium, firms sell q 2 units of the commodity at a market price of p 2 , receiving (after tax) p 3 = (p 2 -J).Market equilibrium at point A in Figure 1 has the feature that marginal consumption benefits equal marginal production costs. The excise tax drives a wedge between marginal benefits and marginal costs. At consumption level q 2 , consumers are willing to pay any amount up to p 2 for additional units of the good, and suppliers would readily provide additional units of the good for any price of p 3 or greater --but these additional transactions do not take place, due to the effect of the tax wedge. The loss associated with the foregone transaction of a single unit at q 2 is: p 2 -p 3 = J. Summing differences between the prices that consumers would pay, and the prices at which suppliers would provide goods, for all units between q 2 and q 1 , indicates the welfare loss due to the excise tax, and is represented by the shaded "Harberger triangle" in Figure 1. In this case, the height of the Harberger triangle is the tax rate, its base is the amount by which sales fall in reaction to the tax, and its area is one measure of the efficiency cost, or "deadweight loss," or "excess burden," associated with the excise tax.

Productivity and Welfare

“…The study of welfare losses, changes in surplus, deadweight loss "triangles", or waste due to inefficient systems of taxation, or excess burden as it is referred to in the public finance literature, has a long history in economics and continues as an active area of research. The existing literature is too voluminous for us to summarize here but excellent surveys are found in Curry et al (1971), Allais (1973Allais ( , 1977, Auerbach (1985), Slesnick (1998), andHines (1999). 11.…”

Repatriation Taxes and Dividend Distortions

“…29 Aggregating this figure for all affiliates yields the following expression for the total inefficiency: dividends to repatriation taxes, but differences in method and description make such a comparison infeasible. 28 Hines (1999b) and Auerbach and Hines (2001) review the application of Harberger triangles to calculate the magnitudes of inefficiencies due to taxation. 29 A critical aspect of this welfare calculation is that tax distortions be properly measured.…”

“Revenue Management” Effects Related to Financial Flows Generated by Climate Policy

“…16 This also generally implies that the total distortion loss related to taxes increases with the square of the tax level (as both the tax level and the marginal damage as function of level increase linearly). This is the famous Harberger triangle loss; see Harberger (1964); see Hines (1998) for a wider discussion. Sources: Various (see references in right-hand column).…”