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May 1981

Thoughts on the Laffer Curve

by Alan S. Blinder

Alan Blinder notes that the proposition that the function relating tax rates to tax revenues rises to a peak and then falls is both an old idea and a noncontroversial one. The important issue raised by the Canto, Joines, Arthur Laffer paper, according to Blinder, is whether current U.S. tax rates are in the prohibitive range of the Laffer curve, implying that a decrease in tax rates would increase tax revenues. Blinder presents a simple model and employs alternative values of the critical labor supply and demand elasticities to provide some hints as to whether or not it is plausible that we could be in this prohibitive range. He concludes that “the revenue maximizing tax rate is very likely to be so high as to be considered ridiculous for any broad based tax.”





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