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Laffer Curves and Public Goods

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  • Hartwick, John

Abstract

We set out and solve a static neoclassical model with a la- bor/leisure choice for agents and a government sector producing a Samuelsonian public good. Numerical solutions vary consid- erably with the elasticity of substitution for commodities in an agent's utility function. We focus on solutions with an income tax rate set by the government (second best solutions). Govern- ment revenue varies with the rate of income tax (expressed in a Laffer Curve) and we observe that such curves generally peak "internally" only for case of "high" elasticity values in the utility function of a representative agent. Inelastic substitution possi- bilities involve the peaking of the La¤er Curve at a corner with the rate of income tax tending to unity. We report on welfare analysis for small changes in the rate of income tax and on first best outcomes (agents charged Samuelson "prices" for the public good).

Suggested Citation

  • Hartwick, John, 2015. "Laffer Curves and Public Goods," Queen's Economics Department Working Papers 274665, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274665
    DOI: 10.22004/ag.econ.274665
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    References listed on IDEAS

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    1. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
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