A general equilibrium analysis of the Laffer argument |
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Authors: | Alan Krause |
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Institution: | 1.Department of Economics and Related Studies,University of York, Heslington,York,UK |
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Abstract: | This paper examines the Laffer argument (i.e., the possibility that an increase in a tax rate may reduce tax revenues, and
vice versa) in a general equilibrium model and using tax reform techniques. Our methodology allows us to examine the Laffer
argument in a very general setting. Despite the high level of generality, we are able to reach some clear conclusions that
happen to provide some support for the intuition that the Laffer effect requires: (1) a “ high” labour-income tax rate, and
(2) a “ large” labour supply response to wage changes. However, the notions of “high” and “large” in our framework are quite
different to the interpretations given them in conventional wisdom about the Laffer argument. The analysis also provides indirect
support for the intuition that it is not optimal for a government to operate on the downward-sloping segment of the Laffer
curve. |
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Keywords: | |
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