A full-fledged analytical model for the Laffer curve in personal income taxation

José Félix Sanz-Sanz

Economic Analysis and Policy, 2022, vol. 73, issue C, 795-811

Abstract: The standard approach to evaluate the Laffer curve of personal income taxation focuses on the impact on income tax revenue alone. However, this is an incomplete depiction of reality, as income tax rate changes also affect revenue collection from other taxes -i.e. consumption taxes and social security contributions. In addition, to the extent that administration and compliance costs correlate with tax rates, the Laffer curve should also consider this correlation. This paper develops a complete microeconomic model for the Laffer curve of personal income tax, taking into account all these omissions. Results confirm that these omissions generate the false illusion of a Laffer curve with a higher-than-real revenue maximum and a narrower prohibitive zone than exists in reality.

Keywords: Laffer curve; Social security contributions; Tax revenue; Personal income tax; Administration costs; Compliance costs (search for similar items in EconPapers)
JEL-codes: D1 D61 H2 H21 H24 H31 H55 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:73:y:2022:i:c:p:795-811

DOI: 10.1016/j.eap.2022.01.008

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