The laffer curve revisited by mathias trabandt and harald uhlig, nber working paper no. The laffer curve is a theory developed by supplyside economist arthur laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. Evidence on the highincome laffer curve from six decades of tax reform in the 1980s, federal income tax policy took center stage in the political arena. Arthur laffers theory on tax cuts comes to life once more. Jul 01, 2000 equivalently, the laffer curve for public consumption lies above the laffer curve of public investment and it can be shown that the revenuemaximizing tax rate will be higher, too. Apr 22, 2020 pdf this article explores the laffer curve of the personal income tax using a microeconomic approach. Figure 1 is a laffer curve relating tax receipts, g, to the tax rate, t. In its most general form, the laffer curve depicts the relationship between tax rates and the revenue the government receivesthat is, a single tax rate exists that maximizes the amount of revenue the government obtains from taxation. Specifically, it mimics the curve found in figure 2 of that paper.
Evidence on the highincome laffer curve from six decades. Denmark and sweden are on the wrong side of the laffer curve for. The laffer curve says that there is no tax revenue collection at the two extreme tax rates of 0% and 100%. Jan 08, 2017 the laffer curve is the most famous, nonempirical economic concept of the last fifty years. Pdf the laffer curve, part 1 bruce bartlett academia. A vat laffer curve is estimated for the eu27 countries in the period 20002010. Evidence on the highincome laffer curve from six decades of. The shape of the laffer curve is shown to be closely associated with both the theoretical underpinnings of the crowding out hypothesis and the literature on the disincentive effects of taxation. For the latter, the substitution effect is mitigated by an income effect on labor. This short article underlines the efficiency considerations reflected by a laffer curve. The idea, famously sketched by then usceconomics professor arthur laffer, was that there was some.
Jun 01, 2004 the story of how the laffer curve got its name begins with a 1978 article by jude wanniski in. Its a commonly known economic principle, especially in the businessfinance world. Laffer project comprises of several small projects. File history click on a datetime to view the file as it appeared at that time.
Model we investigate an economy populated by a unit volume of taxpayers. However, there is a growing consensus that the relationship is sensitive to the level of debt. A little laffer curve reality should guide republican tax. This paper can be downloaded without charge from or from the. The laffer curve describes how changes in tax rates affect government revenues in two ways. Laffer curve definition of laffer curve by the free dictionary. Nov 22, 2011 roughly speaking, though, this is a calculation of the peak of the famous laffer curve. The study of the link between debt and growth has been full of debates, both in theory and empirics. Seems worthy of a khan explanation in the economics playlist.
Results show that countries such as portugal are already in the prohibitive range of the curve. Laffer drew the famous laffer curve, which showed that, starting from a zero tax rate, increases in tax rates will increase the governments tax. Laffer curve learn how tax rates and tax revenues are related. The evidentiary record as of the month the laffer curve was apparently penned on a napkin is that the supplysiders were coy. Lawmakers seeking to reduce or eliminate income and estate taxes frequently claim that doing so will result in an economic boom.
It began with a 1978 article published by jude wanniski in the public interest entitled, taxes, revenues, and the laffer curve. The farright economist, best known for his ridiculous laffer curve that says tax cuts can pay for themselves, guided the. It underpins supplyside economics, reaganomics, and the tea party s economic policies. A nonsymmetric laffer curve with a maximum revenue point at around a 70% tax rate. This is not arthur laffers famous napkin the new york times. The laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a tax rate between 0% and 100% that maximizes government tax revenue. Driven by the belief that the us were lying on the prohibitive part of the laffer curve, the reagan. One of the theorys main assumptions is that if taxation on a certain activity, such as production, is increased beyond a certain. In economics, the laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of the governments tax revenue. Laffer curve are shown to hold for a portion only of the sample countries. The laffer curve is a theory that states lower tax rates boost economic growth. Laffer project is an effort to build complete im environment using the model for developing open source software. Evaluating fiscal policy online lesson economics tutor2u.
The laffer curve concept infers that a tax rate cut could lead to an increase in tax revenue, or a decrease in tax revenue, depending whether you have already passed the optimal tax rate whatever % that may be tax rate t3 might be considered optimal if the objective is to maximise total tax revenues. Stephen moore is chief economist at the heritage foundation and a coauthor with arthur laffer of an inquiry into the nature and causes of. Between the economic theory and economic reality, economy and economic theory. As arthur laffer has noted, there are always two tax rates that yield the same revenues. When an aide to president gerald ford asked him once to elaborate, laffer who is professor of business economies. Oct, 2017 the laffer curve, which looks like the nose of an airplane, is meant to show that higher tax rates can reduce tax revenues and lower tax rates can bring in more money. Deregolamentazione del mercato del lavoro ed effetto laffer. Thoughts on the laffer curve federal reserve bank of st. A quantitative investigation of the laffer curve on the continued. Papers in the working paper series are published on internet in pdf formats.
In this paper, tax policies were examined over the period 1980. Above 76 percent, you really can generate higher revenues by lowering tax rates. Notes on the laffer curve logical economics medium. There is a single tax authority with limited resources, which audits taxpayers. A curved graph that illustrates the theory that, if tax rates rise beyond a certain level, they discourage economic growth, thereby. Laffer curve learn how tax rates and tax revenues are. The laffer curve and the debtgrowth link in lowincome. The laffer curve was conceptualized for modern economies by arthur laffer during a meeting in which he argued against president gerald fords tax increase. Jun 27, 2012 the laffer curve relies on the twin assumptions that the rich create the output in an economy and that they need incentives to choose idleness over work. Evidence on the highincome laffer curve from six decades of tax reform brookings papers on economic activity, 1999, no. The laffer curve concept infers that a tax rate cut could lead to an increase in tax revenue, or a decrease in tax revenue, depending whether you have already passed the optimal tax rate whatever % that may. This possibility is also depicted in chart 3 along with the other two possibilities.
Vanessaezekowitz at english wikipedia you are free. It began with a 1978 article published by jude wanniski in the public interest entitled, taxes, revenues, and the laffer. Apr 26, 2020 pdf this article explores the laffer curve of the personal income tax using a microeconomic approach. This file is licensed under the creative commons attribution 3. The laffer curve revisited 1 by mathias trabandt 2 and harald uhlig 3 1 a number of people and seminar participants provided us with excellent comments, for which we are grateful, and a complete. Supplyside economist arthur laffer is often enlisted to bolster this. The legend of the laffer curve the story of how the laffer curve got its name isnt one of the just so stories by rudyard kipling. The tax rates depicted on a laffer curve range from 0% to 100%. Laffer curve is based on the assumption that in case of the spendable income increase after tax, investors make much more investment. The laffer curve and its policy implications underpinned much of the economic policy in the 1970s and 1980s in both the uk and the us, which aimed to reduce the. Us and the eu15 are located on the left side of these laffer curves, the. As tax rates per pound of income are raised by the government, total tax revenue, or yield, initially increases. A little laffer curve reality should guide republican tax reform. Problems and interactions, conference proceedings 2017, department of economics, university of economics varna, issue 1, pages 195205, december.
Laffer curve noun the noun laffer curve has 1 sense 1. This used to be called the laffer curve, but it now goes by the more respectable name of taxable income elasticity. May 27, 2020 pdf this article explores the laffer curve of the personal income tax using a microeconomic approach. In this paper, we study issues related to the shape of the laffer curve in the. Laffer curve a curve depicting the possible relationship between income tax rates and total tax revenue received by the government. The laffer curve shows the relationship between tax revenue collected by the government and tax rates paid by citizens. Tax rate cuts and tax compliance the laffer curve revisited. When an aide to president gerald ford asked him once to elaborate, laffer who is professor of business economies at the university of southern california drew a simple curve, shown on the next page, to illustrate his point. In its most general form, the laffer curve depicts the relationship between tax rates and the revenue the government receivesthat is, a single. Five critiques of arthur laffers supplyside model show.
Laffer the story of how the laffer curve got its name begins with a 1978 article by jude wanniski in the public interest entitled, taxes, revenues, and the laffer curve. Laffer drew the famous laffer curve, which showed that, starting from a zero tax rate, increases in tax rates will increase the governments tax revenue but that, at some point, when the rates become high enough, further increases in tax rates will decrease revenue. Aug 02, 2015 the laffer curve was first explained by arthur laffer on a napkin the laffer curve is one of the most fundamental ideas in supplyside economics. Taxes, revenues, and the laffer curve national affairs. Pdf this article explores the laffer curve of the personal income tax using a microeconomic approach. Dec 05, 2019 pdf this article explores the laffer curve of the personal income tax using a microeconomic approach.
This graph is based on the article how far are we from the slippery slope. Laffer curve synonyms, laffer curve pronunciation, laffer curve translation, english dictionary definition of laffer curve. The laffer curve is a theoretical explanation of the relationship between the tax rates set by the government and the tax revenue collected at that tax rate. Most importantly, we show that the laffer curve can arise even with very small changes in labor supply effects. Their research estimated laffer curve maximum revenue points to be between 60% to 80% tax rates.
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