The Laffer Curve, Efficiency, and Tax Policy: A Note

Abstract This short article underlines the efficiency considerations reflected by a Laffer curve. In a static context in which inflation is assumed away, the Laffer curve describes what would the response of tax revenue to tax rate change be under increasing inflation if there were allocative efficiency, i. e. given perfect competition and full-employment output. The link between market structure and state of economic activity thus emerges as a critical determinant of the shape of Laffer curve. Under imperfect competition, the entire Laffer curve would reflect how the business “leadership” having emanated from the prevailing market structure, uses taxation as a means of higher profit earning capacity.