Laffer curve
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by
Steven
N.
Durlauf
and
Lawrence
E.
Blume
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Abstract
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.
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Keywords
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 incomeHow to cite this article
Fullerton, Don. "Laffer curve." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 19 January 2012 <http://www.dictionaryofeconomics.com/article?id=pde2008_L000015> doi:10.1057/9780230226203.0922
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