Inefficiency in fiscal policy: A political economy of the Laffer curve

Yutaro Hatta (mentonian.hatt@gmail.com)
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Yutaro Hatta: Graduate School of Economics, Osaka University

No 14-36, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper studies investment decisions by economic agents in cases where the tax rate is decided through voting. It will be shown that, in some cases, only a Pareto-dominated tax policy on the wrong side of the Laffer curve is supported under rational expectations. Thus, the governments may collect revenue in an inefficient way. To that end, a quite plausible assumption, the endogeneity of the return on investment, is essential. Therefore this paper warns about the danger of inefficiency in a wide variety of policies. Further, the model predicts that when the inequality in an economy is low, the tax policy on the wrong side is likely to arise.

Keywords: Political economy; The Laffer curve; Inefficiency in fiscal policies (search for similar items in EconPapers)
JEL-codes: E22 E62 H21 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2014-12
New Economics Papers: this item is included in nep-hpe, nep-mac, nep-pbe, nep-pol and nep-pub
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