Politics, deficits, and the Laffer curve

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