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A Micro-foundation for the Laffer Curve In a Real Effort Experiment

  • Louis Lévy-Garboua
  • David Masclet
  • Claude Montmarquette

A conjecture of Laffer, which had considerable influence on fiscal doctrine, is that tax revenues of a Leviathan state eventually decrease when the tax rate exceeds a threshold value. We conduct a real effort experiment, in which a worker is matched with a non-working partner, to elicit the conditions under which a Laffer curve can be observed. We ran four different treatments by manipulating work opportunities and the power to tax. In the endogenous treatment, the non-working partner chooses a tax rate among the set of possibilities and receives the revenue generated by her choice and the worker's effort response to this tax rate. In the exogenous treatment, the tax rate is randomly selected by the computer and the non-working partner merely receives the revenue from taxes. The Laffer curve phenomenon cannot be observed in the exogenous treatments, but arises in endogenous treatments. Tax revenues are then maximized at a 50% tax rate. We demonstrate that an efficiency tax model (with or without inequity aversion) falls short of predicting our experimental Laffer curve but an alternative model of social preferences provides a micro-foundation for the latter. This new model endogenously generates a social norm of fair taxation at a 50% tax rate under asymmetric information about workers' type. Taxpayers manage to enforce this norm by working less whenever it has been violated but do not systematically reward kind tax setters. Workers who maximize their expected wealth adjust work to the tax rate equitably so that tax revenues remain at a fair level. Workers who respond affectively to norm violations want to hurt, and even refuse to work, so that tax revenues are cut down. Workers endowed with higher work opportunities tend to respond more emotionally to unfair taxation in our experiment, which is consistent with the observed Laffer curve and with the history of tax revolts. En 1974, Arthur Laffer lançait l'idée que les recettes fiscales d'un état Léviathan se mettent à décroître lorsque le taux d'imposition excède un certain seuil. Cette idée a exercé une grande influence sur la doctrine fiscale des dernières décennies. Dans la présente étude, nous procédons à une expérience avec effort réel dans laquelle un « travailleur » est apparié à un partenaire inactif. Le but de l'expérience est de dégager les conditions de validité de la prédiction de Laffer. Nous avons retenu quatre traitements en manipulant les opportunités de travail et le pouvoir de taxer. Dans les deux traitements endogènes (avec opportunité de travail faible et forte), le participant inactif choisit le niveau de taxe qui déterminera le revenu qu'il recevra du travail de son partenaire. Dans les deux traitements exogènes, le niveau de taxe est choisi aléatoirement par l'ordinateur, et les taxes perçues distribuées au partenaire inactif. La courbe de Laffer n'est pas observable dans les traitements exogènes, mais existe bien dans les traitements endogènes, particulièrement lorsque l'opportunité du travail est forte. La recette fiscale est maximum au taux de 50 %. Nous démontrons qu'un modèle de « taxe d'efficience » (avec ou sans aversion à l'inégalité) ne parvient pas à prédire l'ensemble de ces résultats. En revanche, un modèle alternatif de préférences sociales procure des fondements microéconomiques à la courbe de Laffer. Ce nouveau modèle induit une norme sociale de juste taxation au taux de 50 % sous condition d'information asymétrique sur les types de travailleurs. Les travailleurs taxés assurent le maintien de la norme en travaillant moins lorsqu'elle n'est pas respectée, mais ne récompensent pas les choix d'imposition « généreux ». Les travailleurs qui maximisent leur richesse attendue ajustent leur travail au taux de taxation de sorte que la recette fiscale ne s'écarte pas du niveau équitable. Les travailleurs, notamment ceux qui ont une forte opportunité de travail, réagissent plus souvent de manière émotionnelle aux violations de la norme en refusant de travailler, validant ainsi la courbe de Laffer et l'histoire des révoltes de contribuables.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2006s-03.

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Length: 36 pages
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:cir:cirwor:2006s-03
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