Abstract

http://ssrn.com/abstract=394480
 
 

Citations



 


 



The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution


Lawrence H. Goulder


Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Roberton C. Williams III


University of Maryland - Department of Agricultural & Resource Economics; National Bureau of Economic Research (NBER); Resources for the Future


Journal of Political Economy, August 2003

Abstract:     
This paper shows that under typical conditions the simple "excess-burden triangle" formula substantially underestimates the excess burden of commodity taxes. This formula performs poorly because it ignores general equilibrium interactions - most importantly, interactions between the market for the taxed commodity and the labor market. Using analytically tractable and numerically solved general equilibrium models, we show that the simple formula tends to significantly understate excess burden, in some cases by a factor of ten or more. We then derive an implementable alternative to the simple formula. This alternative formula captures interactions that are left out of the simple one, and as a result it is both unbiased and usually more accurate.

Many prior theoretical studies have shown that general equilibrium interactions affect excess burden, but earlier work has not appreciated the bias associated with ignoring these interactions or recognized the quantitative importance of this bias. There are two main sources of our findings. The first is the recognition that the interaction between a new commodity tax and existing labor taxes will tend to be far more important than interactions with other taxes. Second, we focus on the case where the taxed commodity is average in terms of its substitutability with leisure. This greatly simplifies the analysis and allows us to derive an implementable alternative to the simple excess burden formula. One implication of this research is that government programs financed by taxes on particular intermediate or consumer goods must meet a higher benefit hurdle than is often assumed.

Keywords: excess burden, Harberger triangle, general equilibrium efficiency analysis, excess burden approximation

JEL Classification: H21, D61, D5

Accepted Paper Series


Not Available For Download

Date posted: April 21, 2003  

Suggested Citation

Goulder, Lawrence H. and Williams, Roberton C., The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution. Journal of Political Economy, August 2003. Available at SSRN: http://ssrn.com/abstract=394480

Contact Information

Lawrence H. Goulder (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3706 (Phone)
650-725-5702 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Resources for the Future
1616 P Street, NW
Washington, DC 20036
United States
Roberton C. Williams III
University of Maryland - Department of Agricultural & Resource Economics ( email )
Symmons Hall, Rm 2200
College Park, MD 20742-5535
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/cgi-bin/familyinfo.pl?a=a&user=roberton_williams
Resources for the Future ( email )
1616 P Street, NW
Washington, DC 20036
United States
Feedback to SSRN


Paper statistics
Abstract Views: 627

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.250 seconds