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Cover of: Why is the Shape of the Laffer Curve for Consumption Tax Different from that for Labor Income Tax?
Kazuki Hiraga, Kengo Nutahara

Why is the Shape of the Laffer Curve for Consumption Tax Different from that for Labor Income Tax?

Section: Articles
Volume 78 (2022) / Issue 3, pp. 342-361 (20)
Published 03.05.2022
DOI 10.1628/fa-2022-0009
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  • 10.1628/fa-2022-0009
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Summary
Recent studies find that the Laffer curve for consumption tax is not hump-shaped, whereas the Laffer curve for labor income tax is hump-shaped. This study investigates the cause of the difference in the shapes of two Laffer curves. It is shown that the effect on the relative price of leisure (RPL) with respect to the consumption tax rate is completely different from that with respect to the labor income tax rate. The elasticity of the RPL from an increasing consumption tax rate is at most 1, whereas it can be infinity in the case of labor income tax.