The Laffer Curve Doesn't Work in America, but it Does Elsewhere

[Toro]

The Laffer curve is irrelevant to today's American economy because tax rates are not high enough to effect a marginal increase in fiscal revenue. But tax cuts can increase revenues in jurisdictions where tax evasion is rampant.

The paper shows how tax rate cuts can increase revenues by improving tax compliance. The intuition is that tax evasion has externalities: tax evaders protect each other, because they tie down limited enforcement capacity. Thus, relatively small tax rate cuts, which decrease incentives to evade taxes, can lead to increased revenues through spillovers - creating Laffer effects. Interestingly, tax rate cuts here imply increasing effective taxes. The model is consistent with what happened in Russia, and may provide basis for further thinking about tax rate cuts in other countries.

http://www.imf.org/external/pubs/cat/longres.cfm?sk=21558.0

 

[watermark]

The Laffer curve is irrelevant to today's American economy because tax rates are not high enough to effect a marginal increase in fiscal revenue. But tax cuts can increase revenues in jurisdictions where tax evasion is rampant.



http://www.imf.org/external/pubs/cat/longres.cfm?sk=21558.0

It's actually interesting... the "Laffer curve" was a keynesian idea. It's just that Keynes assumed the rate that would maximize income was about 90%. Laffer's innovation was assuming it was much lower. And it worked, to an extent.