EconPapers    
Economics at your fingertips  
 

Tax Aversion, Deficits and the Tax Rate-Tax Revenue Relationship

Roger Waud

No 1533, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper offers a possible explanation for the existence of continual government budget deficits such as experienced in a number of industrialized countries in recent years. Based on the assumption that higher tax rates cause more intensive tax-aversion behavior (tax avoidance and tax evasion), together with the assumption that the time horizon relevant for political decision makers is shorter than that required for complete private sector response to tax rate change, our analysis suggests why there seems to be an inherent bias toward budget deficits. Because of tax aversion an inverse relationship between tax rates and tax revenues may exist at low levels of the tax rate. Consequently determined attempts to eliminate or reduce deficits can become self-defeating, almost certainly so when there is a structural deficit. Our analysis suggests that if an economy is on the downward sloping portion of a stylized Laffer curve political expedience, uncertainty about the shape of the curve, and a common wisdom that tax rate increases reduce deficits can all conspire to keep the budget trapped in deficit. Finally, in the presence of inflation deficit growth may be less if there is indexation of income tax rates to inflation, contrary to conventional wisdom.

Date: 1985-01
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Waud, Roger N."Politics, Deficits, and the Laffer Curve." Public Choice, Vol. 47, No. 3, pp. 509-517, (September 1985)."Tax Aversion and the Laffer Curve." From Scottish Journal of Political Economy, Vol. 33, No. 3, (August 1986).

Downloads: (external link)
http://www.nber.org/papers/w1533.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:1533

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w1533

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:nbr:nberwo:1533