Evaluating the Veracity of the Laffer Curve in Flat-Income-Tax Economies

Abstract

The Laffer Curve is a concept that postulates a concave downward curve, representing the relationship between a country’s tax rates and tax revenue. This theory proposes that an increase in tax rates would initially raise the government’s tax revenue to a certain threshold, and further hikes in tax rates beyond this threshold would result in a decline in total tax revenue. This paper aims to empirically evaluate the validity of the Laffer Curve theory within nations with a flat income tax system. By establishing a quadratic model accounting for the changes in income tax rates and tax revenue of eleven nations, this paper has found that only one of them verifies the Laffer Curve theory. The discrepancy is further analyzed, and the limitations of the model are identified, with further research suggestions in later sections.