Estimating the laffer curve and policy implications

Abstract

This paper re-examines the Laffer curve for the U.S. based on time-series data during 1959–1991. Total personal income tax revenue is specified as a quadratic function of the income tax rate. Different functional forms such as the linear, the log-log, and the semi-log forms are considered. Major findings show that the bellshaped Laffer curve is statistically significant and that the revenue-maximizing tax rate is between 32.67% and 35.21%. The increase in the maximum personal income tax rate from 31% to 36% in the Budget Reconciliation Bill recently passed by the Congress is expected to push the U.S. position on the Laffer curve toward the maximum point and may reduce income tax revenue collected from the highest income group.