So you say you want to tax the rich? Sorry, Charlie, say
Nezih Guner, Martin Lopez-Daneri and Gustavo Ventura;
In our baseline exercise we keep the ‘level’ parameter of the tax
function at its benchmark value, and vary the parameter governing its
curvature or progressivity, τ. For each τ, we compute a steady state in
our economy and report on a host of variables. Figure 1 illustrates the
effects on government revenues – federal and total – in relation to the
benchmark economy. The figure clearly depicts a Laffer-like curve
associated to changes in progressivity. Revenue from federal taxes is
maximised when τ increases from its benchmark value (0.053) to 0.13. The
associated increase in federal taxes is only about 8.4%, or about 0.9%
of output in the initial steady state. At τ = 0.13, the increase in
overall tax collections – including tax collections at the local and
state level and from corporate income taxes – is much smaller: 1.6%.
Bold by HSIB above. And blame the usual suspect;
As τ increases there is a substantial decline in labour supply, the
capital stock, and aggregate output across steady states. Aggregate
output, for example, declines by almost 12% when τ = 0.13. Hence, the
government collects taxes from a smaller economy and while revenue from
federal taxes increases by more than 8%, the increase in total tax
revenue is substantially lower.
He who Laffers last....
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