Laffer curve

Don Fullerton
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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Abstract

A Laffer curve is a hump-shaped curve showing tax revenue as a function of the tax rate. Revenue initially increases with the tax rate but then can decrease if taxpayers reduce market labour supply and investments, switch compensation into non-taxable forms, and engage in tax evasion. The revenue-maximizing tax rate can be calculated from an estimate of the elasticity of taxable income with respect to the after-tax share. Some studies find this elasticity to be near zero, and others find it to exceed 1. The mid-range for this elasticity is around 0.4, with a revenue peak around 70 per cent.
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How to cite this article

Fullerton, Don. "Laffer curve." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 25 October 2014 <http://www.dictionaryofeconomics.com/article?id=pde2008_L000015> doi:10.1057/9780230226203.0922

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