Srivastava, D.K. () (National Institute of Public Finance and Policy)
Abstract
High tax-rates erode their own bases, and thereby adversely affect tax-revenues. This general idea, which is referred to as the Laffer Curve, can be traced back to Kautilya's famous treatise on economics, Arthasastra, and even before that, to the ancient Indian book of laws called the Manusmriti. This paper considers the basic tenets of taxation prescribed in these texts and attempts to interpret the tax-rates proposed for different economic activities using Laffer Curve analytics. In particular, an attempt is made to interpret the core rate of taxation proposed in these works, viz., one-sixth of the tax-base. The implicit assumption in prescribing moderate tax-rates appears to indicate the value judgement that in most economic activities, the negative substitution effect of increasing taxation overpowers the positive income effect, if any, at rather low tax-rates.
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Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number
99/1.
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