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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. 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.
    3. 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.
    4. Bender, Bruce, 1984. "An Analysis of the Laffer Curve," Economic Inquiry, Western Economic Association International, vol. 22(3), pages 414-420, July.
    5. 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.
    6. Roger N. Waud, 1985. "Tax Aversion, Deficits and the Tax Rate-Tax Revenue Relationship," NBER Working Papers 1533, National Bureau of Economic Research, Inc.
    7. 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.
    8. Robert J. Barro & Chaipat Sahasakul, 1983. "Measuring the Average Marginal Tax Rates from Social Security and the Individual Income Tax," University of Chicago - George G. Stigler Center for Study of Economy and State 29, Chicago - Center for Study of Economy and State.
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