Arnold Harberger

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Arnold Harberger (b. 1924 in Newark, New Jersey) is an American economist. He devised Harberger's Triangle, which is used largely in welfare economics.

In tax policy circles, he is noted for popularizing the idea that a tax on corporate assets, i.e the classical corporate income tax on gains accruing to the corporate entity without a complete corresponding offset or credit to owners of the corporation (either debt or equity holders) is not only on capital assets held in corporate solution, but upon all such assets. Therefore, the incidence on the corporate tax is borne not only by corporate owners of say a hammer but on owners of hammers outside of corporations because the price of such assets must adjust to equilibrium in a world with the corporate tax (The Incidence of the Corporate Income Tax, 70 Journal of Political Economy 215 (1962)). In the years since this idea has gained acceptance by the tax academy, Harberger has retreated from this view.

The extraordinary result, that owners of corporate assets did not bear the tax, rested upon the assumptions of his model which mimicked the Heckscher-Ohlin model of international trade with 2 sectors, 2 inputs and Cobb-Douglas utility functions and production functions. With those assumptions, since all factors of production were free to costlessly change sectors, each factor labor and capital got paid exactly its "value of marginal product" and if we have constant returns to scale, the total payment to each factor exactly equals the total value the factor contributed. Therefore if one sector -- the corporate sector -- were taxed and the other not taxed, goods sold by the taxed sector would shrink as that sector shrinked so as to equilibrate the marginal revenue products of both capital and labor to higher pre-tax levels so that after the tax, the wage rates paid to the capital and labor in the taxed sector would equal those paid in the untaxed sector. Net after-tax prices of goods in the taxed sector would go up since the total spent by consumers between the two sectors remain unchanged in a Cobb-Douglas model.