Xianhang Zhang wrote:
James Wells wrote:
I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists.
For example, from
Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd
You can derive
R = t(bc + da - bdt)/(b + d)
Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function?
James
I'm not sure exactly what people should be objecting to. Logically, at a tax rate of 0, revenue is 0, at a tax rate of 100, revenue is zero. There exists a positive revenue for tax rates in between that range so logically, a maxima must exists within that range.
Xianhang Zhang
.
Yes, I understand and agree with the argument underlying the Laffer curve.
What some people might object to is a misunderstanding of the Laffer curve, i.e. they object to the straw man that *any* tax cut will increase revenue. More frequently, the objection seems to be directed toward the motives of Laffer believers. At best, the objection seems to be that the revenue maximizing tax rate is much higher than curent rates. What I've never seen is an argument against the Laffer curve from a supply and demand framework. I'm just wondering if it is even possible for the supply and demand curves to be shaped shaped in such a way that the Laffer curve does not apply to some market.
James
