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Politics, deficits, and the Laffer curve

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  • Roger Waud

Abstract

Even if there were only a positively sloped tax rate-tax revenue relationship, or if a negatively sloped region were not in the relevant tax rate range, the existence of a lagged private sector response to tax rate change that exceeds the relevant time horizon for political decision makers is conducive to the existence of a budget deficit bias. Given the existence of a negatively sloped region of the Laffer curve, especially if it begins at reasonably low tax rates, determined attempts to eliminate or just reduce deficits can become self-defeating, particularly if there is a structural deficit. 3 Moreover, once the economy is on the downward sloping portion of the Laffer curve a combination of political expediency, uncertainty about the shape of the curve, and a common belief that tax rate increases reduce deficits all can conspire to keep the budget trapped in deficit. Finally, given the existence of inflation and a marginally progressive income tax, deficit growth may be less if there is indexation of income tax rates to inflation, contrary to conventional wisdom. Copyright Martinus Nijhoff Publishers 1985

Suggested Citation

  • Roger Waud, 1985. "Politics, deficits, and the Laffer curve," Public Choice, Springer, vol. 47(3), pages 509-517, January.
    • Handle: RePEc:kap:pubcho:v:47:y:1985:i:3:p:509-517
    DOI: 10.1007/BF00182151
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    References listed on IDEAS

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    1. Fullerton, Don, 1982. "On the possibility of an inverse relationship between tax rates and government revenues," Journal of Public Economics, Elsevier, vol. 19(1), pages 3-22, October.
    2. Barro, Robert J & Sahasakul, Chaipat, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," The Journal of Business, University of Chicago Press, vol. 56(4), pages 419-452, October.
    3. Bender, Bruce, 1984. "An Analysis of the Laffer Curve," Economic Inquiry, Western Economic Association International, vol. 22(3), pages 414-420, July.
    4. Buchanan, James M & Lee, Dwight R, 1982. "Politics, Time, and the Laffer Curve," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 816-819, August.
    5. Barro, Robert J. & Sahasakul, Chaipat, 1983. "Measuring the Average Marginal Tax Rates from Social Security and the Individual Income Tax," Working Papers 29, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    6. Stuart, Charles E, 1981. "Swedish Tax Rates, Labor Supply, and Tax Revenues," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 1020-1038, October.
    7. Roger N. Waud, 1985. "Tax Aversion, Deficits and the Tax Rate-Tax Revenue Relationship," NBER Working Papers 1533, National Bureau of Economic Research, Inc.
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