Tax Rate Cuts and Tax Compliance—The Laffer Curve Revisited
IMF Working Papers, January 1, 2008
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- Tax Rate Cuts and Tax Compliance—The Laffer Curve Revisited
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Bibliographic details
- Authors: Tamás K. Papp, Elöd Takáts
- Published: January 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868692.001
Summary findings
- The paper shows how tax rate cuts can increase revenues by improving tax compliance.
- Relatively small tax rate cuts, which decrease incentives to evade taxes, can lead to increased revenues through spillovers — creating Laffer effects.
- Interestingly, tax rate cuts here imply increasing effective taxes.
- The model is consistent with what happened in Russia, and may provide basis for further thinking about tax rate cuts in other countries.
Mechanism and intuition
- Tax evasion has externalities: tax evaders protect each other because they tie down limited enforcement capacity.
- Reduced incentives to evade (via tax rate cuts) free up enforcement capacity, improving overall compliance and generating revenue spillovers.
- These spillovers can make modest rate cuts revenue-increasing despite the conventional static tax-rate–revenue tradeoff.
Evidence and scope
- The model presented is consistent with observed outcomes in Russia.
- The analysis is positioned as potentially informative for considerations of tax rate cuts in other countries.
Policy implications and considerations
- Small reductions in statutory tax rates can, under the modeled externality, raise total tax revenue by improving compliance.
- Policymakers should consider enforcement-capacity externalities when evaluating the revenue effects of tax-rate changes.
- The paper may provide a basis for further thinking about tax rate cuts in other countries.