On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues / Don Fullerton.

Format:

Book

Author/Creator:

Fullerton, Don.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0467.

NBER working paper series no. w0467

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1980.

Summary:

When Arthur Laffer or other "supply side advocates" plot total tax revenue as a function of a particular tax rate, he draws an upward sloping segment called the normal range, followed by a downward sloping segment called the prohibitive range. Since a given revenue can be obtained with either of two tax rates, government would minimize total burden by choosing the lower rate of the normal range. A brief literature review indicates that tax rates on the prohibitive range in theoretical and empirical models have been the result of particularly high tax rates, high elasticity parameters, or both. Looking at labor tax rates and total revenue, for example, the tax rate which maximizes revenue will depend on the assumed labor supply elasticity. This paper introduces a new curve which summarizes the tax rate and elasticity combinations that result in maximum revenues, separating the "normal area" from the "prohibitive area." A general-purpose empirical U.S. general equilibrium model is used to plot the Laffer curve for several elasticities, and to plot the newly introduced curve using the labor tax example. Results indicate that the U.S. could conceivably be operating in the prohibitive area, but that the tax wedge and/or labor supply elasticity would have to be much higher than most estimates would suggest.

Notes:

Print version record

April 1980.