TITLE

WELFARE COST OF HIGHER TAX RATES: AN EMPIRICAL LAFFER CURVE FOR THE NETHERLANDS

AUTHOR(S)
Van Ravestein, A.; Vijlbrief, H.
PUB. DATE
July 1988
SOURCE
De Economist (0013-063X);Jul1988, Vol. 136 Issue 2, p205
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
On the basis of a simple general equilibrium model calculations arc made of the welfare cost of higher tax rates. Furthermore, the Laffer curve for The Netherlands is estimated. Taking 1970 as the basic year and assuming that all tax revenues were paid back in lump-sum benefits, the Laffer curve topped at a marginal rate of 66.9% and the MEB stood at 1.24. This means that an additional guilder in tax revenues involves a welfare loss of Dfl. 1.24 on top of the direct tax burden. Considering the true proportion of government income being spent on benefits, the Laffer curve is found at a marginal tax-rate of 70. I've In that case the MSB amounts to 0.83 in 1970. The most striking finding was the sharp rise in the MSB, from 0.83 in 1970 to 6.36 in 1985. This high welfare cost is an indication that The Netherlands is nearing the limits of taxation on income. It is found that market signals are disturbed most when tax revenues arc used for income transfers in a form which does not influence allocation decisions at the margin (lump-sum benefits). In that case relative prices are affected, whereas income effects are neutralized.
ACCESSION #
17888403

 

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