Laffer Curve Research Articles

Estimation of Laffer Curve: Evidence from Pakistan

Laffer curve is a tradeoff between tax cuts and tax revenues. The sketch of Laffer curve was drawn by Arther Laffer at a dinner with his friends on his napkin that reduction in taxes will increase tax revenues. Lafer curve explained that lower tax rate could encourage an additional output and it would increase income, which builds bigger tax base in an economy. In this research we have estimated the Laffer curve on the basis of Taxes on goods and services for Pakistan economy for the period of 1990 to 2016. Time series data have been collected from the world economic data base. Results explained that all the variables are significant and signs of coefficients are in accordance with the theory. Results confirm that Laffer curve is alive in Pakistan economy but its existence is in the prohibited area of Laffer curve. It is suggested that plans of taxation should be modified in such a way that maximum number of people could bring under the tax brackets. The taxation structure of the economy should ensure to lower the indirect taxes, encourage the progressive taxes and elasticity of taxation should be increased. The pattern of taxation should be encouraged after introducing some sort of incentives such as relief in the income tax and higher bank deposit rates should be realize.

Personal Income Tax (PIT) and Economic Growth in Nigeria: A Vector Autoregression (VAR) Analysis

Purpose of the article: Quite a number of studies have shown that tax revenues significantly affect the economic growth in both developed and developing countries; however, there is scanty empirical evidence as regards whether personal income tax (a major component of tax revenue) affects economic growth in Nigeria. Methodology/methods: The ex-post facto research design was adopted and the theoretical framework was anchored on Laffer Curve Theory (LCT). Yearly time series data of personal income tax and the gross domestic product (GDP) were obtained from the Federal Inland Revenue Service (FIRS) and the Central Bank of Nigeria (CBN) statistical bulletins during theperiod 1987–2017. The data obtained was analysed using the Vector Autoregression (VAR) model via STATA 13.0. Scientific aim: This paper investigated the effect of personal income tax (PIT) on economic growth in Nigeria. Findings: The findings of the study revealed that personal income tax has significantly contributed to the level of economic growth in Nigeria, though negatively. Contributions: Based on the findings of the study, it was recommended that the regulatory framework of taxation in the country should put in place a more effective tax revenue generation system that can enhance better administration of personal income tax. The measure should emphasise and address the accountability of personal income tax. In addition, a well-equipped database on personal income tax or taxpayers should be established by the governments with the aim of identifying all possible sources of income of taxpayers.

The Khaldûn−Laffer Curve Revisited: A Personal Income Tax−Based Analysis for Turkey

This paper focuses on an old but still discussed postulate, the Khaldun-Laffer curve, and empirically applies it to personal income tax by using annual time-series data of Turkey for the period 1970-2015. From our analysis, two fundamental findings emerge: first, Turkish data provides evidence in favor of the Khaldun-Laffer curve, suggesting that there is a non-linearity between tax rates and tax revenue. Second, the optimal tax rate that maximizes revenue from personal income tax is 15.03% against the current rate we estimate at 15.37%. These findings imply that Turkey’s current personal income tax rate falls slightly into the prohibitive range of the curve. Overall, it is safe to argue that the current personal income tax rate should be lowered to its optimal value to maximize the revenue from personal income taxation. If done so, the Turkish fiscal authorities would be able to generate more revenue with a relatively lower tax rate.

Tax rate, government revenue and economic performance: A perspective of Laffer curve

The Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue. This paper explores the relationship between tax rate (direct tax on labor income), government revenue and economic performance in a perspective of the Laffer curve by applying Computable General Equilibrium (CGE) model. The results show that the top of China's Laffer curve is about 40%. The government should consider changes in the entire taxation system and not just changes in direct taxes while increasing direct tax rate. If China wants to maximize tax revenues, the direct tax rate should be 35%. We conduct a variety of sensitivity analyses and conclude that the government tax peak is always 5–10% earlier than the apex of the Laffer curve. So, if a country has reached the top of the Laffer curve, this paper strongly recommends that tax cuts will have positive implications for the economy and government revenue.

Tax Avoidance and Fiscal Limits: Optimization of Tax Bur-den on Economy with «Non-observed» Sector

The article deal with problem to optimization of the level of tax burden on economy with «non-observed» sector. The methodology of this study is the concept of the Laffer curve. The main method of investigation is the graphical method.The article presents different variants of graphical interpretation of the Laffer curve under conditions of «shadowing» the economy, revealing the main regularities, highlighting the «non- observed» sector, as well as reflecting the sensitivity of tax revenues to crisis phenomena.Authors draw the following main conclusions. First, if the economy is on ascending branch of Laffer curve and at the same time the government doesn’t take into account the presence of «non-observed» sector, then an increase in tax rates leads to significantly overstated expected values of tax revenues. Second, if the economy is on descending branch of Laffer curve, then an increase in the tax burden has a deterrent effect on tax revenues - economic effects of tax policy would create an incentive to drop employment and production in the official sector, increase tax evasion. Thirdly, the economy without tax compliance problems is much more sensitive to economic crises than the economy with the illegal sector.Thus, underestimation of «non-observed» sector of economy and neglect of the effects of income from tax avoidance call into the question the correctness of current fiscal policy.The obtained results can be used to model the dependence of tax revenues and output on tax burden in economy with «non-observed» sector and to develop a sound fiscal policy.

Measuring the Impact of Population Aging on Tax Revenue: Evidence from Japan and Korea

This paper assesses empirically the tax implications of population aging in Japan and Korea. We achieve the research objectives by taking two approaches: (1) a vector autoregression (VAR) analysis; and (2) an estimated dynamic stochastic general equilibrium (DSGE) framework. Based on data from 1973 to 2015, the VAR results for both countries reveal that an aging shock decreases GDP, hours, consumption, and investment. As the tax bases fall, so do tax revenues. Conditioned on estimated DSGE models, the second approach is to characterize Laffer curves at two steady states: the current (as of 2015) and aged (as of 2060) states. We find that the adverse effect of population aging on tax revenues is more serious for Korea than for Japan. Even in the aged state, Japan has room to generate tax revenues comparable to the current state, whereas combinations of tax rates satisfying this property do not exist for Korea.

Income and occupational choice responses of the self-employed to tax rate changes: Heterogeneity across reforms and income

This study examines the responsiveness of self-employment income and choice of self-employment rather than wage employment to tax changes in the Netherlands. We exploit several tax reforms in 1999–2012 that affected income from self-employment and wage income differently. We estimate an Elasticity of Taxable Income (ETI) of 0.3 for the self-employed. We find that the self-employed respond much stronger to tax incentives than wage earners, and did so more to the major tax reform in 2001 than to the two smaller reforms in 2005 and 2007. Further, contrary to earlier studies, we find the ETI for the self-employed to be decreasing in income. However, we find no evidence that net-of-tax earnings differentials affect occupational choice responses.

Shock Therapy and Entrepreneurial Flare #Brexit

PurposeMuch has been written about trade deal opportunities after Brexit (e.g. Minford et al., 2017; Singham and Tylecote, 2018) but much less about envisaged “supply side mechanisms” that would translate a Brexit shock into improved UK competitive performance. Indications as to the supply side mechanisms involved can be found in some pro-Brexit writings and speeches and revolve around cutting regulation and reducing taxation, to spur innovation entrepreneurship. The authors contend that these measures align to a broad set of policy measures associated with Economic Shock Therapy, the Laffer Curve and the associated “Washington Consensus” (Williamson, 2005). The authors are looking to stimulate a conversation around whether these measures are most likely to stimulate entrepreneurial innovation and growth. The authors open by contrasting these concepts to growth equilibrium dynamics drawn from Wicksell, Keynes and Schumpeter – and by implication dynamic Walrasian General Equilibrium – to pose the question, is entrepreneur-led growth best led via slashing regulations and taxes or by focussing on correcting existing market failures? The purpose of this paper is to promote controversy and debate as to which “supply side measures” are most effective in enabling entrepreneurial growth.Design/methodology/approachThe authors briefly review the pro-Brexiteer economic framework and relate this to broader Economic Shock Therapy and Laffer Curve concepts; how these have been applied and how some argue they can become “supply side” enablers in a positive Brexit innovation and entrepreneurship transformation. By drawing upon fundamental economic relationships such as Wicksell’s (1898) “Natural Rate of Interest”, the authors highlight the importance of information asymmetry and regulatory distortion in financial markets, resulting in some entrepreneurs (and associated innovations) failing to receive the capital their project merit. The authors pose the question, whether Shock Therapy, Laffer Curve type tax cuts and any Brexit “bonfire of regulation” will raise entrepreneurial growth and success.FindingsBoth Shock Therapy and Laffer Curve inspired tax cuts have a patchy record of success, despite notable achievements in post-1991 Poland. The authors stress entrepreneurs drive innovation and growth, and a key support to them requires correcting “access to finance” market failures. It is questionable if Economic Shocks contribute anything to resolving this fundamental problem.Originality/valueThe authors open the supply side debate on anticipated “Brexit Transformation” in the context of long standing (some maybe long forgotten) theoretical understandings, thereby posing the question as to whether potential Brexit-related deregulation, tax cuts and “Economic Shock” therapy are likely to raise entrepreneurial competitive advantage and success rates. Market failure in financial market support for small firm growth and innovation needs are highlighted. Arguably, economic growth and innovation would be better sustained by addressing these failures, than introducing the “unknowns” and risks associated with a substantial Economic Shock.

Side constrained optimisation to capture capacity of choices in the multinomial logit model: case study of income tax policy in the USA prior to the 2009 economic crisis

The choices' limited capacities of the discrete choice models must be taken into account. We propose a convex optimisation formulation in which the exponential formulation of the logit model is upheld in the Karush-Kuhn-Tucker (KKT) conditions. The capacities of the choices are then added to the formulation as side constraints. A solution algorithm based on the successive coordinate descent is proposed. For numerical evaluation, we investigate US income tax policies for the years prior to the 2009 crisis using multinomial logit models. The tendency of the states for choice of income tax versus other tax sources is assessed and it is found that: 1) all states show a propensity to levy more income tax; 2) this propensity has a ceiling cap similar to what is already known from the 'Laffer curve'; 3) residents in the states with already high income tax are more likely to be subjected to even heavier income tax within caps.

The Elasticity of Taxable Income in Spain: 1999-2014

We study how taxable income responds to changes in marginal tax rates, using as a main source of identifying variation three large reforms to the Spanish personal income tax implemented in the period 1999-2014. The most reliable estimates of the elasticity of taxable income (ETI) with respect to the net-of-tax rate for this period are between 0.45 and 0.64. The ETI is about three times larger for self-employed taxpayers than for employees, and larger for business income than for labor and capital income. The elasticity of broad income (EBI) is smaller, between 0.10 and 0.24, while the elasticity of some tax deductions such as the one for private pension contributions exceeds one. Our estimates are similar across a variety of estimation methods and sample restrictions, and also robust to potential biases created by mean reversion and heterogeneous income trends.

How do tax progressivity and household heterogeneity affect Laffer curves?

How much additional tax revenue can the government generate by increasing the level of labor income taxes? In this paper, we argue that the degree of tax progressivity is a quantitatively important determinant of the answer to this question. To make this point, we develop a large scale overlapping generations model with single and married households facing idiosyncratic income risk, extensive and intensive margins of labor supply, as well as endogenous accumulation of human capital through labor market experience. We calibrate the model to U.S. macro, micro, and tax data and characterize the labor income tax Laffer curve for various degrees of tax progressivity. We find that the peak of the U.S. Laffer curve is attained at an average labor income tax rate of 58 % . This peak (the maximal tax revenues the government can raise) increases by 7 % if the current progressive tax code is replaced with a flat labor income tax. Replacing the current U.S. tax system with one that has Denmark' s progressivity would lower the peak by 8 % . We show that modeling the extensive margin of labor supply and endogenous human capital accumulation is crucial for these findings. With joint taxation of married couples (as in the U.S.), higher tax progressivity leads to significantly lower labor force participation of married women and substantially higher labor force participation of single women, an effect that is especially pronounced when future wages of females depend positively on past labor market experience.

Design of Essential Elements Involved in China’s Carbon-Tax Taxation System and Its Implementation Strategies

Based on a series of theoretical study of Pigou tax principle, polluter pays principle (PPP), double dividend theory, tax incidence and tax burden transfer, carbon tax excess burden, and the Laffer curve, this article determines the design of essential elements involved in carbon tax system, including the scope of carbon tax, the objects of Taxation, the tax payer, the tax link, the tax rate, and the tax preference, etc. Meanwhile, some principles are proposed when implementing strategies, that is, the principle of combination of efficiency and equity, the principle of tax rate dynamic adjustment, and the principle of tax neutrality.

Потенциал повышения налоговой нагрузки при сокращении зоны фискальных противоречий (на материалах экономики Казахстана)

Relevance. In 2009, tax reform was carried out in Kazakhstan and basic tax rates were reduced. Over the past period, the level of state budget expenditures declined to 19% of GDP. The need to ensure the inclusive economic growth requires an increase in the tax burden and improvement in the redistributive function of the budget.The purpose of this study is to quantify the limits of increasing fiscal burden, which will not hinder economic growth and fiscal function of budget, by taking into account the reduction in the width of the fiscal inconsistencies’ zone from 2010 to 2018.Hypothesis. It is expected that the calculations carried out in the paper, using the approaches of the theoretical model of the Laffer curve and fiscal analysis, will provide a real corridor within which it will be possible to increase the tax burden in the economy of Kazakhstan.The methodological basis of the study aims to establish the relationship between tax burden, economic growth and budget tax revenues, which are used in the theoretical model of «Tax Laffer curve». In order to construct the production and fiscal points of the Laffer curve for the Kazakhstani economy, we applied the methods of fiscal analysis using production and institutional functions of Balatsky E.V. We used the data of the Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan.As a result of the study, the authors estimated the maximum points of the production function curve and the fiscal function curve . The comparison with the actual value of the tax burden allowed quantifying the potential increase of tax rate in Kazakhstan. But the re­vealed trend of reducing fiscal inconsistencies zone’s width for 2010-2018 required an adju­stment of the results, taking into account the low degree of freedom for the possible manipulation of tax rates.Therefore we carried out additional calculations with the prolongation of the natural limit of the fiscal burden, i.e. 1st kind of the Laffer points. The results show that the stage-wise increase in tax-to-GDP ratio amounting to 4-5% within 10 years from the level of 2018 is possible without any negative effect on economic growth and tax collection.The results of the study can be used to implement tax policy in Kazakhstan.

The Elasticity of Taxable Labour Income in the Netherlands

The Elasticity of Taxable Labour Income in the Netherlands

Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence From Uruguay

Based on detailed administrative tax records, we implement a bunching design to explore how individual taxpayers respond to personal income taxation in Uruguay. We estimate a very modest elasticity of taxable income at the first kink point (0.06) driven by a combination of gross labour income and deductions responses. Taxpayers use personal deductions more intensively close to the kink point and underreport income to the tax authority. Our results suggest that the efficiency costs of taxation are not necessarily large in contexts characterised by limited deduction opportunities. Policy efforts should be directed at broadening the tax base and improving enforcement capacity

Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence from Uruguay

By using a bunching design on rich administrative tax records from Uruguay's tax agency we explore how individual taxpayers respond to personal income taxation in a context with high sheltering opportunities. We estimate a moderated elasticity of taxable income in the first kink point (0.16) driven by a combination of gross labor income and deductions responses. Taxpayers use personal deductions more intensively close to the kink point and undereport income unilaterally or through employer-employee collusion. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities rather than eroding tax progressivity.

Dynamic Fiscal Limits and Monetary-Fiscal Policy Interactions

This paper analyzes the impact of monetary policy on public debt sustainability through the lens of a general equilibrium model with fiscal limits. We find that the mere possibility of a binding ZLB may have detrimental effects on debt sustainability, as a kink in the Laffer curve induces a dead-weight loss in the present discounted value of future primary surpluses. Moreover, debt sustainability improves with monetary policy activeness, that is, with the elasticity of the interest rate to changes in inflation and the output gap. On this basis, we assess the trade-off between economic stabilization and debt sustainability depending on the monetary policy environment. In normal times, large public spending shocks may engender perverse debt dynamics and cause economic contractions. At the ZLB, a muted trade-off between stabilization and sustainability instead expands the fiscal margin, especially if coupled with a commitment to a more active monetary policy during normal times. JEL Classification: E52, E61, E63

拉弗曲线理论在我国的适用问题探讨

拉弗曲线理论在我国的适用问题探讨

Short Term Effects of Households Debt Restructuring: Evidence from the French Experience

In some cases, debt relief might be efficient in decreasing household overindebtedness: it lowers the risk of re-default and ultimately leads to an increase in the expected value of the repayment. In other cases, it benefits households who would have been otherwise able to repay. In this paper, we assess whether French households are on the wrong side of the "debt Laffer curve" in the short term. When facing financial distress, households can file a case to a "households over-indebtedness commission" (HDC). The HDC can order an immediate repayment or grant a moratorium. We show that the cases are randomly allocated across case managers and that some case managers decide persistently more favorably towards households or creditors. Over a two-year horizon, a toucher manager on households leads to a 2 percentage points increase of the redefault rate but also to a 6 percentage point increase in the amount recovered by creditors at the agregate level. Our approach allows us identifying characteristics of the households related to lower return in asking a repayment. This provides case managers guidance for a more efficient bankruptcy process. JEL Codes: D1, G2, K35.

The elasticity of corporate taxable income—Evidence from South Africa

How strongly do firms reduce their reported taxable income when corporate tax rates increase? We add new evidence from an emerging economy to a so far developed-country-dominated literature.