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A full-fledged analytical model for the Laffer curve in personal income taxation

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  • Sanz-Sanz, José Félix

Abstract

The standard approach to evaluate the Laffer curve of personal income taxation focuses on the impact on income tax revenue alone. However, this is an incomplete depiction of reality, as income tax rate changes also affect revenue collection from other taxes -i.e. consumption taxes and social security contributions. In addition, to the extent that administration and compliance costs correlate with tax rates, the Laffer curve should also consider this correlation. This paper develops a complete microeconomic model for the Laffer curve of personal income tax, taking into account all these omissions. Results confirm that these omissions generate the false illusion of a Laffer curve with a higher-than-real revenue maximum and a narrower prohibitive zone than exists in reality.

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  • Sanz-Sanz, José Félix, 2022. "A full-fledged analytical model for the Laffer curve in personal income taxation," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 795-811.
    • Handle: RePEc:eee:ecanpo:v:73:y:2022:i:c:p:795-811
    DOI: 10.1016/j.eap.2022.01.008
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    More about this item

    Keywords

    Laffer curve; Social security contributions; Tax revenue; Personal income tax; Administration costs; Compliance costs;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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