Inherent in the tax-cutting policies that have characterized supply-side economics in the US and Europe is the theory that increasing taxes does not necessarily increase tax revenue. As Arthur Laffer noted in 1974, "there are always two tax rates that yield the same revenues; a government will collect no tax revenue by imposing rate of either 0% or 100%." Economists Mathias Trabandt and Harald Uhlig have set about to map the Laffer curve in a simple growth model set to the economies of the US and the EU using new data for tax rates on labor, capital, and consumption for 1995-2007. The lesson that Trabandt and Uhlig draw from an example is that one must not examine the consequences of increased capital taxation in and of itself, but rather only by simultaneously examining its effect on labor tax revenues.
Laffer Curve revisited Michael Knowles Yale Economic Review; Winter 2010; 6, 1; Docstoc pg. 8 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
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