Laffer Curve Research Articles

Supply-side economics with AS-AD in Ramsey dynamic general equilibrium

The Ramsey dynamic general equilibrium (RDGE) model has been applied broadly within mainstream macroeconomic analysis. While the labor market of the RDGE model has long been developed, any consensus on the goods market has remained elusive. This has made supply-side policy analysis within it difficult since it is founded upon the premise of aggregate supply (AS) featuring more prominently than aggregate demand (AD). Specifying a relative price of output that makes the goods market consistent with the recursive structure of the RDGE paradigm, the paper then applies AS-AD quantitatively to study productivity increases and income tax rate decreases that have been a centerpiece in supply-side economics. The paper contributes how both a productivity increase and a capital income tax rate decrease cause a net shift out of AS relative to AD that lowers the relative price of output. It shows how productivity increases and tax rate reductions quantitatively increase macroeconomic variables. The increase in economic activity remains proportional to the percentage increase in productivity, giving rise to our introduction of the concept of a productivity multiplier. Tax rate reductions cause increased economic activity at a decreasing rate as the level of the tax rate decreases. The paper shows the sense in which capital income tax rate reductions quantitatively have larger magnitude effects on output, consumption, investment, and capital wealth, while labor income tax rate reductions have larger magnitude effects on employment. Tax revenue implications are also presented with the first Laffer curves linked to the RDGE AS-AD analysis. Limitations, extensions and policy applications are suggested.

Evaluating fiscal policy reforms using the fiscal frontier

We develop a Fiscal Frontier which traces out the maximum government debt level that can be sustained at a given welfare cost. Through duality, the intertemporal policy mix underpinning the Frontier mirrors standard Ramsey policy and defines an upper limit on the welfare gains that can be achieved by any fiscal reform. The Frontier is then used to evaluate a variety of fiscal reforms: (1) one-off changes in tax instruments considered in Laffer curve calculations, (2) a gradual reduction in capital taxation proposed by Lucas (1990), and (3) fiscal consolidation strategies akin to those considered by the Congressional Budget Office. Conventional Laffer curve calculations significantly under-estimate the sustainable debt of the US. The desirable pace of capital tax abolition has slowed since the 1970s, but the reform remains close to the Frontier. Achieving debt reduction targets considered by the Congressional Budget Office is typically very costly, especially when the fiscal consolidation is large and must be achieved quickly, but a simultaneous capital tax reform can more than offset those costs in all cases we consider.

The Laffer curve and the growth maximizing tax rate analysis in achieving optimal economic growth

The Laffer curve and the growth maximizing tax rate (GMTR) can create optimal economic growth, which is very important in preparing the state revenue and expenditure budget and economic development. The implementation of economic development requires financing so that government expenditure growth often exceeds gross domestic product (GDP) growth. The size of the government is a measure of the ratio of total government spending to GDP. The amount of government spending is something that often happens in almost all countries in the world, especially in countries that are in the process of development. The problem is how the government can finance these increasing expenditures. There are two options available, namely on receipts from abroad in the form of foreign loans or on receipts from within the country. The tax sector is the determining sector that provides the largest contribution to domestic revenues. The size of this contribution requires that tax revenues continue to be increased, which can be seen from the tax ratio. The tax ratio is the ratio of total tax revenue to GDP. Several international multilevel studies have obtained in-depth analysis of this problem from the Laffer curve and GMTR approaches. This study convinces that the Laffer curve and GMTR can be applied to create the optimal economic growth.

Tax evasion, fiscal policy and public debt: Evidence from Spain

We reconsider the macroeconomic effects of fiscal policy in an estimated dynamic stochastic general equilibrium model with limited tax enforcement. The results of the Bayesian estimation provide evidence in favor of a sizeable underground sector in Spain, with the associated tax evasion having contributed, on average, to 23% of public debt accumulation over the period 1985–2015. From the standpoint of fiscal policy, the estimated results show that the presence of tax evasion triggers a resource-reallocation mechanism that dampens the effects on economic activity caused by an increase in government spending, while it amplifies those due to changes in tax rates. Because of this mechanism, we show that tax-based consolidation plans may become completely ineffective in reducing the debt-to-GDP ratio if tax enforcement is imperfect. Moreover, by characterizing the long-run Laffer curve, we show that the actual taxation in Spain is inefficiently too high, in the sense that the government might increase tax revenues by cutting the actual tax rates on both corporate and personal income.

Law enforcement and the size of the informal sector

This study presents cross-country evidence indicating that the relationship between the size of the informal sector and tax rates is ambiguous. Motivated by this finding, a standard two-sector model is augmented with endogenous law enforcement, which depends on the size of the informal sector and government expenditure. Additionally, based on microdata from Colombia, taxes and law enforcement are necessary to match the observed size of the informal sector. Meanwhile, the dependence of law enforcement on government expenditure creates a non-linearity in the form of a Laffer curve. Therefore, lowering tax rates would not necessarily reduce the size of the informal sector.

The euro area sovereign debt crisis and the sovereign debt Laffer curve: a historic assessment for 1999–2014

This article addresses the historical evolution of sovereign debt trajectories since the beginning of the euro area up to the corresponding sovereign debt crisis, using certain key economic concepts previously proposed by the literature in connection to other historic sovereign debt events. It first recovers the concept of the sovereign debt Laffer curve, which efficiently addresses the non-linear relationship between economic output and public debt issuance. It then presents an important set of theoretic economic concepts that accurately describe the onset of debt vulnerabilities negatively impacting economic growth, therefore linking these fundamental but heterogeneous public debt-related concepts under the unifying concept of the said sovereign debt Laffer curve, which adequately encompasses these heterogeneous concepts. For example, fundamental concepts such as debt vulnerability, ‘debt overhang’, or ‘illiquidity vs. insolvency’ are adequately contextualized under the said Laffer curve. This innovative historical perspective might be useful in the analysis of subsequent sovereign debt crises, as well as in tackling future research in public debt sustainability, namely where the design and implementation of sustainable public debt policies in advanced economies is concerned.

Tax reforms and elasticity of taxable income: estimation using the current population survey

ABSTRACT Changes in taxable income can capture many of the behavioural responses to changes in tax policies. In this paper, using the publicly available Current Population Survey (CPS) data and analysing two of the most recent tax reforms (Tax Cuts and Jobs Act of 2017 and the American Taxpayer Relief Act of 2012), we provide a new estimate for the elasticity of taxable income with respect to marginal tax rates. As is common in the literature, the paper conducts a panel data analysis and compares taxable income from before and after tax reforms to estimate the elasticity. Using an instrumental variable approach, we find an elasticity of 0.81, a value that is within the range of estimates found in previous studies.

The impact of Baumol’s disease on government size, taxation and redistribution

This article investigates the implications of Baumol’s cost disease for a publicly provided good in the presence of distortionary taxation. A model is presented in which the publicly provided good experiences low labour productivity growth relative to the private good. The public sector will grow monotonically with the productivity differential between sectors and the tax rate will be pushed to the top of the Laffer curve over time. This article also finds that the desire for redistribution will be crowded out by the impact of unbalanced growth and Baumol’s cost disease.

МОДЕЛЬ ОПТИМІЗАЦІЇ ПОДАТКОВОГО НАВАНТАЖЕННЯ НА СІЛЬСЬКОГОСПОДАРСЬКІ ПІДПРИЄМСТВА У КОНТЕКСТІ СТАЛОГО РОЗВИТКУ

The aim of the article is to develop an applied methodology for identifying promising areas of agricultural development in Ukraine, which is based on the optimization of the tax burden on the industry through the use of production and institutional function. The theoretical and methodological basis of the study is the concept of Laffer curve and methods of scientific knowledge (econometric methods of studying the impact of taxes on the economy, regression analysis). The study uses a methodological approach that allows to optimize the tax burden on agriculture, which increases the industry’s output at a significantly lower level of the tax burden. With the help of econometric modeling, the optimal values of the tax burden have been calculated; the main patterns of the impact of the tax burden on the economic growth of agricultural production have been determined. The modern development of agriculture within the framework of the concept of sustainable development should be aimed at achieving food security and slowing down global warming. In order to obtain opportunities for the real implementation of the declared sustainable development goals in practice, economic entities in the country’s agricultural sector must function effectively according to the criteria of socio-economic, environmental and financial efficiency. One of the most effective levers for achieving such components of efficiency in the current conditions of the development of agriculture in Ukraine is the optimization of the tax burden. It has been established that the indicators of the tax burden have a significant impact on the development trajectory of the industry and form opportunities for increasing the level of social protection of the population. To identify and model the impact of the tax burden on the development of agriculture and the possibility of achieving signs of sustainable development, it is proposed to use a four-factor production-institutional function. As econometric parameters of the functioning of the economic and production system of the agrarian sector, the level of wages, the volume of capital investments, land area, and taxes are chosen. The econometric parameters demonstrated by the elasticity coefficients of the selected factors made it possible to calculate the Laffer points of the first and second order, on the basis of which the level of the tax burden is justified, which contributes to the growth of agricultural production in the context of tax optimization. pressure on the industry. Further research should be aimed at developing a strategy for the development of agriculture in Ukraine

Redistributive Regulations and Deadweight Loss

AbstractRedistribution generates equity benefits and deadweight loss. A canonical result in economic theory holds that policymakers generally cannot escape the problem of deadweight loss by redistributing through non-tax rules. Nonetheless, the Office of Management and Budget (OMB) released a revised framework for regulatory analysis in November 2023 that encouraged federal agencies to consider distributional benefits – but not the deadweight loss of redistribution – when choosing which non-tax rules to promulgate. By omitting deadweight loss from distributional analysis, OMB’s framework will lead to inaccurate estimates of the welfare effects of regulatory changes and will leave agencies vulnerable to legal attack on the ground that they have ignored an important aspect of regulatory redistribution in their decision-making. This article illustrates how agencies can incorporate deadweight loss into distributional analysis and thereby place their redistributive rules on firmer economic and legal footing. It shows how the “elasticity of taxable income” approach – widely used by tax economists – can be modified to the regulatory context so that agencies can estimate the deadweight loss of redistributive regulations while incurring relatively modest additional analytical burdens. Explicitly incorporating deadweight loss into distributional analysis will provide the public with a more accurate view of the welfare consequences of regulatory actions and will make regulations more robust to legal challenges.

Elasticity of Taxable Income and Optimal Taxation in Brazil

Elasticity of Taxable Income and Optimal Taxation in Brazil

Excessive Income Inequality In Russia As A Threat To Economic Growth And Societal Security

The author makes the case that the growth of the Russian economy in the 2000s was socially detrimental as it was accompanied by an increased inequality of Russians both in terms of current incomes and accumulated wealth. A qualitative analysis of the socio-economic inequality that has developed in modern Russia is carried out in unity with its quantitative characteristics; the factors contributing to inequality in various countries are explained, both objective and influenced by policy. Inequality in income distribution, on one hand, is seen as a possible accelerator of economic growth, and on the other hand, the way it slows the GDP growth down is also revealed. Describing the normal income stratification as accelerating and the excessive stratification as, on the contrary, slowing down the economic growth, the author, by analogy with the Laffer curve, proposes an original income stratification curve, on the basis of which a set of interconnected proposals is substantiated to return the excessive differentiation of Russians to the limits of normality in order to guarantee sustainable economic development and reliable societal security in Russia.

Public Debt Sustainability in Nigeria

Public debt is a vital instrument for governments to fund public expenditure. This paper examined the public debt sustainability and economic growth in Nigeria using annual time series data from 1981 to 2021 and the generalized method of moments (GMM) technique. The variables used in the study include; Real GDP, external debt, domestic debt, debt servicing and government consumption. To capture the period the country was given debt relieve fund we used debt relief dummy. The effect of recession on the economy was captured using recession dummy. The empirical result showed that debt overhang exists with inverted U-shaped debt Laffer curve. The optimum public debt threshold range is 30% – 40% while the threshold benchmark is 36% for composite debt stock and 33% for external debt stock. Based on the findings, the paper recommends that Nigerian government should ensure optimal utilization of external debt to avoid crowding out of investments and also the existence of debt overhang.

ЗОВНІШНІЙ ДЕРЖАВНИЙ БОРГ УКРАЇНИ В УМОВАХ ВІЙНИ

The article is devoted to the assessment and analysis of the dynamics of external public debt and key indicators of external debt security of Ukraine for 2009 – July 2023. During the war, Ukraine is at a critical juncture where it must balance the imperative of post-conflict reconstruction with the need to manage external debt to ensure economic sustainability. The multifaceted nature of this challenge requires an integrated approach that encompasses policy coordination, diplomatic engagement, and in-depth economic analysis. The key emphasis in this study is on the analysis of the external public debt of Ukraine, in the context of the challenges caused by the war, highlighting the relationship between economic strategies and the needs of post-war reconstruction. The analysis of key indicators of external debt security proved a critical level of external debt burden. Based on the constructed Laffer curve, the threshold value of the ratio of external public debt to GDP is determined. The article is devoted to the study of theoretical and practical aspects of the assessment and analysis of external public debt and key indicators of Ukraine's external debt security, for the development of an effective external public debt management system and the transformation of public borrowing into a tool for post-war and post-war recovery of the country. The following scientific methods were used to achieve the goals of the scientific research: analysis and generalization – to study the current state of external debt security in Ukraine; comparison and compilation - for the analysis of the system of external debt security indicators; statistical analysis – to study the dynamics of debt security indicators and calculate an integral index based on them. Based on the analyzed dynamics of the external public debt, a conclusion was made about the "critical" debt load with peak values in 2014 (military conflict in certain territories of Donetsk and Luhansk regions), in 2020–2021 (overcoming the negative consequences of the global Covid-19 pandemic) and in 2022–2023 (military aggression of Russia from the beginning of 2022). To determine the threshold value of the indicator of the ratio of public debt to GDP, the construction of the Laffer debt curve is proposed. On the basis of retrospective analysis and modern challenges, key possible ways of improving approaches to the management of Ukraine's external public debt in the conditions of martial law are determined.

The individual Laffer curve: evidence from the Spanish income tax

The individual Laffer curve: evidence from the Spanish income tax

Inflation Rate and Tax Revenue Performance: A Time Series Assessment of Nigeria’s Four Decades Experience

There have been hyper inflationary trends in Nigeria going side by side with efforts of government to jack up its revenue generation. The broad objective of this study is to investigate the relationship between inflation rate and tax revenue in Nigeria in the past four decades. The study adopted a quantitative approach to the analysis of the impact of inflation on tax revenue performance in Nigeria using time series secondary data on Tax revenues, inflation rate, Foreign Direct Investment and Real Exchange, generated between 1981 and 2022, from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria. Descriptive Statistics and Linear regression was carried out to establish the relationship between Inflation and tax revenue. The regression output was obtained using STATA, which is commonly used for time series data. The Laffer Curve Theory, which explains the theoretical relationship between the tax rate and government revenue obtained via taxing provided the theoretical framework on which the findings of this study leans on. The results of the study showed that there is a significant and positive relationship between inflation and Company Income Tax (CIT) in Nigeria; and between inflation and Petroleum Profit Tax (PPT) in Nigeria. However, the results of the study showed no significant relationship between inflation and Value-Added Tax (VAT) in Nigeria. From the findings, the study recommends that policymakers and tax authorities should take into consideration the impact of inflation when designing and implementing tax policies on CIT and PPT. Also, the lack of significant relationship between inflation and VAT suggests that policymakers and tax authorities should focus on other factors that affect VAT such as the level of economic activity, tax administration, and tax incentives.

SIMPLIFY AND IMPROVЕ: REVISITING BULGARIA’S REVENUE FORECASTING MODELS

In the thirty years since the end of real socialism, Bulgaria has gone from having a rather radically ‘different’ tax system to adopting flat-rate taxation with marginal tax rates falling from figures as high as 40% to 10% for both the corporate and personal income tax. Crucially, the econometric forecasting models in use at the Bulgarian Ministry of Finance hinted at an increase in tax revenue compatible with the so-called ‘Laffer curve’. Similarly, many economists held the view that revenues should increase. However, reality fell short of those expectations based on forecasting models and rooted in mainstream economic theory. Thus, this paper asks whether there are better-performing forecasting models for personal and corporate income tax revenues in Bulgaria that are readily implementable and overperform the ones currently in use. After articulating a constructive critique of the current forecasting models, the paper offers readily implementable, transparent alternatives and proves their superiority.

Taxation, social welfare, and labor market frictions

Taking taxation inefficiencies as given, a well-known public finance result is that in partial equilibrium the elasticity of taxable income (ETI) is a sufficient statistic for the deadweight loss (DWL) from labor income taxation. We revisit this result using a general equilibrium macroeconomic framework with labor search frictions. Our theory parses out the extent to which search frictions in and of themselves can distort the DWL-ETI relationship. Numerical analysis suggests that DWL is nearly 10 percent above the ETI given search frictions, only. Accounting for externalities can drive this figure up to about 20 percent, and accounting unemployment benefits can increase this number up to nearly 40 percent. Parsing out these effects both analytically and quantitatively yields novel results that contribute jointly to the public finance and macroeconomic literatures.

The Early Invention of the so-called Laffer Curve and the Mathematics of the Progressive Tax in the Italian Tradition

The theories of progressive income taxation developed in the Italian debate of the last century have been discussed in depth in a review article by Domenican-tonio Fausto (2008). Italian economists have taken an active part in the debate on the progressive taxation of income and wealth. In general, despite a few oppo-nents, the idea of progressive taxation is agreed upon for political and social rea-sons. In this broad debate on progressivity developed in Italy, there is also an ana-lytical path that Fausto's article does not consider. The first mathematical contri-bution on this topic was put forward by Tullio Martello in his polemic book against the progressive tax, La progressività in teoria e in pratica (1895). The debate was concluded in the 1950s by a mathematical economist and follower of Pareto, Raf-faele D'Addario. D'Addario is worth considering because he explicitly introduced the revenue curve. The decreasing part is well known today as the Laffer curve.

Tax avoidance and evasion in a dynamic setting

We study an intertemporal utility maximization problem where taxpayers can engage in both tax avoidance and tax evasion. Evasion is costless but is fined if discovered, while avoidance is costly but might be successful (i.e. deemed legitimate) with a given probability (β) upon audit. We find that traditional deterrence instruments (fine and frequency of audit) reduce optimal evasion but, in contrast with results in a static framework, they have no impact on optimal avoidance. In fact, tax avoidance depends negatively on its marginal cost and positively on both its probability of success (β) and the tax rate. We show that non-compliance behavior may result in a Laffer curve for fiscal revenues and that the revenue maximizing tax rate is lower the higher β. We characterize the optimal level of β by taking into account different government objectives: minimizing evasion, minimizing non-compliance (evasion plus avoidance), or maximizing revenues. Our results suggest that specific policies (e.g., tax simplification) need to be implemented to deter avoidance and we illustrate their impact on evasion.