The Incidence and Efficiency Effects of Taxes on Income from Capital

This article reexamines the incidence and efficiency cost of the discriminatory taxation of capital income in the United States. It is argued that Harberger's 1966 estimates of the static welfare loss were subject to two important mistakes. Their correction lowers the efficiency cost estimates approximately 38 percent. The paper also compares the corrected results of the Harberger model with those achieved with an algorithmic solution procedure for a general equilibrium model. When the latter approach is used with the same two-sector division of production, the results are very similar to those of Harberger's model. With disaggregation to 12 production sectors, however, the loss estimates increase by an average of 40 percent.