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The impact of income tax changes on government revenue: Moving beyond the Laffer curve

Research output: Working paper/PreprintWorking paper

Richard McManus, Gulcin Ozkan, Dawid Trzeciakiewicz

Original languageEnglish
PublishedApr 2021

King's Authors

Abstract

How do tax revenues respond to changes in tax rates? We show that the answer to this question crucially depends on the level of marginal tax rates and the size of fiscal multipliers. We first estimate the revenue impact of tax shocks in a wide range of existing empirical frameworks, using data from the US, the UK, Germany and, separately, from a sample of OECD countries. We find that tax multipliers are consistently large and tax revenues fall in response to tax rises; and this effect is particularly strong when marginal taxes are raised. We then incorporate the wedge between the marginal and the average tax rates into a number of standard general equilibrium models, reconciling a major discrepancy between the theoretical and empirical work on fiscal multipliers.

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