A Graphical Exposition of the Link between Two Representations of the Excess Burden of Taxation
The excess burden of taxation typically has two graphical representations in undergraduate microeconomics and public finance textbooks: the IC/BC (indifference curve/budget constraint) representation and the demand/supply representation. The IC/BC representation has the advantage of showing the behavioral response to a distortionary tax and how a substitution effect alone contributes to the excess burden, whereas the demand/supply representation, also known as the Harberger Triangle, has the advantage of being easily estimated using observable variables. The authors provide a link between the two excess burden representations by illustrating how the Harberger Triangle in the demand/supply framework corresponds to the line segment that represents the excess burden in the IC/BC framework.
Volume (Year): 36 (2005)
Issue (Month): 4 (October)
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