NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues

Don Fullerton

NBER Working Paper No. 467 (Also Reprint No. r0344)
Issued in April 1980
NBER Program(s):   PE

When Arthur Laffer or other "supply side advocates" plot total tax revenue as a function of a particular tax rate, he draws an upward sloping segment called the normal range, followed by a downward sloping segment called the prohibitive range. Since a given revenue can be obtained with either of two tax rates, government would minimize total burden by choosing the lower rate of the normal range. A brief literature review indicates that tax rates on the prohibitive range in theoretical and empirical models have been the result of particularly high tax rates, high elasticity parameters, or both. Looking at labor tax rates and total revenue, for example, the tax rate which maximizes revenue will depend on the assumed labor supply elasticity. This paper introduces a new curve which summarizes the tax rate and elasticity combinations that result in maximum revenues, separating the "normal area" from the "prohibitive area." A general-purpose empirical U.S. general equilibrium model is used to plot the Laffer curve for several elasticities, and to plot the newly introduced curve using the labor tax example. Results indicate that the U.S. could conceivably be operating in the prohibitive area, but that the tax wedge and/or labor supply elasticity would have to be much higher than most estimates would suggest.

download in pdf format
   (236 K)

email paper

This paper is available as PDF (236 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0467

Published: Fullerton, Don. "On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues." Journal of Public Economics, Vol. 19, No. 1(October 1982), pp. 3-22. citation courtesy of

Users who downloaded this paper also downloaded these:
Ballard, Fullerton, Shoven, and Whalley The Relationship between Tax Rates and Government Revenue
Lindsey w1761 Estimating the Revenue Maximizing Top Personal Tax Rate
Waud w2643 Tax Aversion, Optimal Tax Rates, and Indexation
Trabandt and Uhlig w15343 How Far Are We From The Slippery Slope? The Laffer Curve Revisited
Alesina and Perotti w4637 The Political Economy of Budget Deficits
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us