Abstract
The article examines the problem of Laffer curve visualization. The purpose of the article is to propose a visual representation of the curve that takes into account the effects of capital outflow. The following research methods were used in the course of the research: historical method, comparative and critical analysis, graphical method. The author analyzes existing methods of the graphical representation of the curve drawin upon the interpretation of the original theoretical assumptions used for building a coordinate plane and taking into account additional factors (inflation, underground economy etc.). The author defines conditions for capital outflow and, as a result, for tax migration. The author proposes her own interpretation of the term “tax migration”, listing the key reasons for its occurrence. A variant of Laffer curve visualization in different coordinate planes has been developed, factoring in tax migration. The obtained results made it possible to establish a range of permissible changes to tax rates within which government tax revenue increases. The time frame in which tax revenue grows is different, depending on the dynamics of the tax rates. Highlights When carrying out tax reforms in a country, governments must start by empirically calculating a range of recommended changes to the tax burden, in this case tax policy might result in higher tax revenues It is not expedient to reduce the tax burden unless there is a goal to encourage production rather than to earn more revenue for the treasury because in the future the concessions will by no means result in a matching increase in tax revenue In order to use the Laffer curve as a tool of analysis it is necessary to specify the conditions for its application and its graphical representation in each case For citation Kakaulina M. O. Visual Representation of Laffer Curve Factoring in Implications of Capital Outflow. Journal of Tax Reform, 2017, vol. 3, no. 2, pp. 103–114. DOI: 10.15826/jtr.2017.3.2.034 Article info Received May 28, 2017; accepted July 4, 2017
Highlights
Can lower tax rates result in higher tax revenue for the government? The question has been repeatedly raised during tax policy debates in the USA and other developed and developing countries.The relationship between the tax burden and the amount of tax revenue collected by the government is shown by the Laffer curve
When carrying out tax reforms in a country, governments must start by empirically calculating a range of recommended changes to the tax burden, in this case tax policy might result in higher tax revenues
Well-grounded and scientifically plausible theoretical interpretations of this particular shape of the curve are very scanty in the literature. It is the fragility of the original arguments and the extreme simplification of the justifications behind the curve shape that resulted in the emergence of more complex and modified variants of its graphical representation that take into account specific behavior of economic agents in response to changing tax rates in their domicile
Summary
Can lower tax rates result in higher tax revenue for the government? The question has been repeatedly raised during tax policy debates in the USA and other developed and developing countries. Laffer’s concept, boasts some success stories, for example, reforms by Presidents Harding and Coolidge and John Kennedy. The hypothesis by Arthur Laffer about the influence of tax rates on the amount of the government’s tax revenue is typically represented with an inverted U-shaped curve that crosses the horizontal axis at 0 % and 100 %. Well-grounded and scientifically plausible theoretical interpretations of this particular shape of the curve are very scanty in the literature. It is the fragility of the original arguments and the extreme simplification of the justifications behind the curve shape that resulted in the emergence of more complex and modified variants of its graphical representation that take into account specific behavior of economic agents in response to changing tax rates in their domicile. The task of elaborating the visual representation of the Laffer curve in relation to the current state of the economic system remains highly relevant today against the backdrop of constant societal development
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