Equilibrium and Optimal Tax Rates in the Models of Aggregate Demand and Aggregate Supply (Laffer-Keynesian Synthesis)

Abstract

In contemporary economic theories, the role of taxes is studied one-sidedly. Keynesianism mostly emphasizes the mechanisms by which taxes affect the economy through aggregate demand and almost does not take into account the mechanism of their effect on the aggregate supply-side. The problem of taxes is also seen one-sidedly by supply-side economics, in which the effect of the tax rate on aggregate supply is brought to the fore. The paper presents a macroeconomic equilibrium model in which aggregate demand and aggregate supply are considered not in relation to the price level, as is traditionally done, but in terms of functions dependent on the average tax rate. The concepts of optimal and equilibrium tax rates are introduced. Based on an analysis of the model, it is shown that when the government tries to maintain the equilibrium average tax rate at a fixed level, the optimal tax rate becomes dependent on the price level, and an appropriate change in aggregate demand may lead to approximation of the optimal rate to the equilibrium rate. It is also demonstrated that each given value of the equilibrium tax rate can be matched with a set of functions and curves of aggregate supply and the national budget's tax revenues. © 2013 Bull. Georg. Natl. Acad. Sci.