Working Paper: NBER ID: w23064
Authors: Don Fullerton; Chi L. Ta
Abstract: To help first- or second-year graduate students in economics apply their theoretical training, this paper shows how to solve a simple and intuitive computable general equilibrium (CGE) model using a calculator. Because this simplified Harberger model uses Cobb Douglas functional forms for utility and production, one can solve for all input and output prices and quantities with no taxes and then solve for exact measures of output with a large tax change (not using derivatives). We then show how to solve simultaneously for capital and labor prices (incidence on the sources side of income), for both output prices (incidence on the uses side), for exact measures of overall welfare loss such as the equivalent variation, for excess burden and marginal excess burden, and for the effects on revenue in the form of a Laffer Curve.
Keywords: Cobb-Douglas; General Equilibrium; Tax Incidence; Excess Burden; Laffer Curve
JEL Codes: A20; C63; C68; D04; D58; H21; H22; H23; H24; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate income tax (H24) | capital income (E25) |
| tax incidence (H22) | welfare loss (D69) |
| total welfare loss (D69) | average excess burden (H22) |
| marginal dollar of tax revenue (H21) | marginal excess burden (D61) |