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Why is the Shape of the Laffer Curve for Consumption Tax Different from that for Labor Income Tax?

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  • Kazuki Hiraga
  • Kengo Nutahara

Abstract

Recent studies find that the Laffer curve for consumption tax is not hump-shaped, whereas the Laffer curve for labor income tax is hump-shaped. This study investigates the cause of the difference in the shapes of two Laffer curves. It is shown that the effect on the relative price of leisure (RPL) with respect to the consumption tax rate is completely different from that with respect to the labor income tax rate. The elasticity of the RPL from an increasing consumption tax rate is at most 1, whereas it can be infinity in the case of labor income tax.

Suggested Citation

  • Kazuki Hiraga & Kengo Nutahara, 2022. "Why is the Shape of the Laffer Curve for Consumption Tax Different from that for Labor Income Tax?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 78(3), pages 342-361.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2022-0009
    DOI: 10.1628/fa-2022-0009
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    1. Hansen, Gary & İmrohoroğlu, Selahattin, 2018. "Replacing income taxation with consumption taxation in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 48(C), pages 15-28.
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    Cited by:

    1. Blum, Bianca & Franke, Marcel & Malmberg, Elina & Neumärker, Bernhard & Weinel, Jette, 2023. "The New Ordoliberalism: A case for UBI?," The Constitutional Economics Network Working Papers 01-2023, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    2. Neumärker, Bernhard & Weinel, Jette Leonie, 2024. "The implications of UBI on the utility function and tax revenue: Further calibrating of basic income effects," FRIBIS Discussion Paper Series 02-2024, University of Freiburg, Freiburg Institute for Basic Income Studies (FRIBIS).
    3. Kazuki Hiraga & Kengo Nutahara, 2019. "Fragility in modeling consumption tax revenue," CIGS Working Paper Series 19-003E, The Canon Institute for Global Studies.

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    More about this item

    Keywords

    Laffer curve; tax revenue; consumption tax; labor income tax; relative price of leisure; Laffercurve; taxrevenue; consumptiontax; laborincometax; relativepriceofleisure;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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