James Wells wrote:
I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists.
For example, from
Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd
You can derive
R = t(bc + da - bdt)/(b + d)
Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function?
James
I'm not sure exactly what people should be objecting to. Logically, at a tax rate of 0, revenue is 0, at a tax rate of 100, revenue is zero. There exists a positive revenue for tax rates in between that range so logically, a maxima must exists within that range.
Xianhang Zhang
