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 Leisure 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 is a preview of subscription content, log in to check access.
Agell, J., and M. Persson. 2001. On the analytics of the dynamic Laffer curve. Journal of Monetary Economics 48: 397–414.CrossRefGoogle Scholar
Feldstein, M. 1995. The effect of marginal tax rates on taxable income: A panel study of the 1986 Tax Reform Act. Journal of Political Economy 103: 551–572.CrossRefGoogle Scholar
Fullerton, D. 1982. On the possibility of an inverse relationship between tax rates and government revenues. Journal of Public Economics 19: 3–22.CrossRefGoogle Scholar
Gahvari, F. 1989. The nature of government expenditures and the shape of the Laffer curve. Journal of Public Economics 40: 251–260.CrossRefGoogle Scholar
Goolsbee, A. 1999. Evidence on the high-income Laffer curve from six decades of tax reform. Brookings Papers on Economic Activity 1999(2): 1–64.CrossRefGoogle Scholar
Gruber, J., and E. Saez. 2002. The elasticity of taxable income: Evidence and implications. Journal of Public Economics 84: 1–32.CrossRefGoogle Scholar
Kopczuk, W. 2005. Tax bases, tax rates and the elasticity of reported income. Journal of Public Economics 89: 2093–2119.CrossRefGoogle Scholar
Lindsey, L. 1987. Individual taxpayer response to tax cuts, 1982–1984: With implications for the revenue maximizing tax rate. Journal of Public Economics 33: 173–206.CrossRefGoogle Scholar
Malcomson, J.M. 1986. Some analytics of the Laffer curve. Journal of Public Economics 29: 263–279.CrossRefGoogle Scholar
Smith, A. 1776. An inquiry into the nature and causes of the wealth of nations. London: J.M. Dent & Sons, 1975.Google Scholar
Stuart, C.E. 1981. Swedish tax rates, labor supply, and tax revenues. Journal of Political Economy 89: 1020–1038.CrossRefGoogle Scholar