Abstract
The classical backward bending of the labor supply curve has been extended to the case of the inverted S-shaped labor supply curve during the last three decades. According to this extension, at very low net wage levels near the subsistence income level, the positive shape of the supply curve of labor may also be curved backward and become negatively sloped. A decrease in the low wage rate requires an increase in the labor supply, to maintain a minimum income level for survival. The S-shaped curve leads to a double-peaked Laffer curve, which also includes the possibility of three tax rates, each of which enables the collection of the same tax revenue. This may occur in contrast to the traditional single-peaked Laffer curve, which has two tax rates with the same revenues.
Highlights
The classical approach to the shape of the Laffer curve is based on the idea of the backward-bending labor supply curve
During the last couple of decades, other economists have introduced a new shape of the labor supply curve, with an inverted S-shaped labor supply
An increase in the net wage rate leads simultaneously to an increase in both the net income used for consumption, as well as in the hours required for leisure
Summary
The classical approach to the shape of the Laffer curve is based on the idea of the backward-bending labor supply curve. Following the work of Hanoch [1], this approach indicates that a backward bending of the labor supply curve necessarily leads to the classical bell-shaped Laffer curve with one peak. The purpose of the following model is to challenge the conventional classical approach advocated by Arthur Laffer and many other experts. Their approach is that the relationship between tax revenues and tax rates imposed on employees necessarily creates a bell-shaped curve that contains one peak point. The first considers a backward-bending labor supply, while the new second approach is based upon an inverted S-shaped labor supply, resulting in new shapes of the Laffer curve
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