A Laffer curve is a hump-shaped curve showing tax revenue as a function of the tax rate. Revenue initially increases with the tax rate but then can decrease if taxpayers reduce market labour supply and investments, switch compensation into non-taxable forms, and engage in tax evasion. The revenue-maximizing tax rate can be calculated from an estimate of the elasticity of taxable income with respect to the after-tax share. Some studies find this elasticity to be near zero, and others find it to exceed 1. The mid-range for this elasticity is around 0.4, with a revenue peak around 70 per cent.
- Capital supply
- Elasticity of labour supply
- Elasticity of taxable income
- Excess burden of taxation
- Home production
- Income effect
- Labour supply
- Laffer curve
- Marginal and average tax rates
- Progressive and regressive taxation
- Revenue maximization
- Substitution effect
- Supply side economics
- Tax avoidance
- Tax compliance
- Tax evasion
- Tax revenue
- Taxation of corporate profits
- Taxation of income
This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume
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Fullerton, D. (2008). Laffer Curve. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_2088-1
Publisher Name: Palgrave Macmillan, London
Online ISBN: 978-1-349-95121-5
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