debates, one side will often cite the logic of the Laffer curve, arguing that
a reduction in tax rates will lead to such an increase in economic activity
that total tax revenues will rise. This outcome is possible, but by no
means guaranteed. Total tax revenues will only increase if current tax
rates are so high as to be above in Figure 18-4. The problem is that
we do not know for sure where is, although research in the United
States suggests that current income-tax rates are far below , so that
reductions in tax rates will reduce tax revenues.
1 Note that some taxes change behaviour and correct a market failure, as in the environmental
taxes discussed in Chapter 17. In these cases, the tax improves allocative efficiency. Our discussion
of excess burden in this chapter applies to situations where a tax is imposed in an otherwise
efficient market.
t 0
t 0
t 0