Academic journal article Yale Economic Review

Laffer Curve Revisited

Academic journal article Yale Economic Review

Laffer Curve Revisited

Article excerpt

INHERENT IN THE TAX-CUHlNG policies that have characterized supply-side economics in the United States and Europe is the theory diat increasing taxes does not necessarily increase tax revenue. As Arthur Laffer noted in 1974, "there are always two tax rates that yield the same revenues"; a government will collect no tax revenue by imposing a tax rate of either 0% or 1 00%. There exists therefore a single rate within this range at which a government can maximize tax revenue, though arguments abound from proponents of both increasing and decreasing tax rates as to upon which side of the curve a government lies.

Economists Mathias Trabandt and Harald Uhlig have set about to map the Laffer curve in a simple growth model set to the economies of the United States and the EU using new data for tax rates on labor, capital, and consumption for 1 995-2007. The fundamental question in their recent paper, "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," explores how the behavior of households and firms in the United States compared to those in the EU-1 4 adjusts if fiscal policy changes taxes. They use the Laffer curve as a framework to consider the incentives of tax cuts and, most pertinently, on which side of the Laffer curve these nations lie.

Mathias and Trabandt begin by separating potential government revenue into two categories: labor taxes and capital taxes. The most important of these proves to be the former, insomuch as increases in labor taxes appear uniformly to provide greater potential revenue for the United States and EU-14 nations. The EU-1 4 demonstrates a particular unresponsiveness to capital tax increases - a mere 1% increase in tax revenue - and this observation prompts the authors to ask why the capital tax curve is so flat. …

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