Two Sources Of Bias In Estimating The Peak Of The Laffer Curve

Dan Usher

No 1320, Working Paper from Economics Department, Queen's University

Abstract: Important as it is for public policy, there is still no consensus about the size of the revenue-maximizing tax rate at the top of the Laffer curve. The purpose of this essay is not to supply a correct rate, but to identify difficulties in doing so. 1) Estimates of the revenue-maximizing tax rate are distorted by the discrepancy between the “elasticity of taxable income” at observed tax rates and as it would become at the revenue-maximizing tax rate, a discrepancy illustrated with reference to tax evasion as the source of the contraction in the tax base in response to increases in the tax rate. 2) When the response of tax revenue to tax rate is through the supply of labour, the Laffer curve may not be humped at all because the supply of labour may expand, rather than contract, in respond to an increase in the tax rate, causing tax revenue to rise more than proportionally to the tax rate all the way up to 100%.

Keywords: Duty to Vote; Tax Evasion; Labour-leisure Choice (search for similar items in EconPapers)
JEL-codes: H21 H26 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-11
New Economics Papers: this item is included in nep-iue, nep-mac, nep-pbe and nep-pub
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:qed:wpaper:1320

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