Looking inside the laffer curvemicrofoundations and empirical evidence applied to complex tax structures

Abstract

This paper evaluates the microfoundations of the laffer curve. In doing so, the paper discusses a model for the elasticity of tax revenue against changes in the marginal tax rates in the presence of complex tax structures. In particular, the case of schedular multi-rate income taxes with nongenuine allowances is considered. For this type of tax design, analytical expressions for the Laffermarginal tax rate and Laffer-threshold elasticity are obtained and discussed. Calculations are conducted for the individual taxpayer and the population aggregate. An empirical analysis applied to the case of the increasing marginal rates of the Spanish individual income tax, which came into effect in 2012, confirms that the �behavioural effect� decreased the potential �mechanical� tax revenue of this regulatory change by more than 2.31 billion euros. This decreased revenue was the result of enforcing the regulatory change when more than 48% of the filed tax returns (9.3 million tax returns) appeared on the �prohibited side� of the Laffer curve.