\"We find that the U.S. can increase tax revenues by 30% by raising labor taxes
ID: 1152886 • Letter: #
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"We find that the U.S. can increase tax revenues by 30% by raising labor taxes but only 6% by raising capital income taxes, while the same numbers for the EU-14 (European Union economies) are 8% and 1% respectively." Economists Matthias Trabandt & Harald Uhlig One can conclude from the research of these economists that: The U.S. is on the left side of its Laffer Curve for both labor taxes and capital income taxes. The EU-14 economies are on the left side of their combined Laffer Curve for labor taxes but not for capital income taxes. The U.S. is on the left side of its Laffer Curve for labor taxes but not for capital income taxes Neither the U.S. nor the EU-14 is on the left side of its respective Laffer Curve for either labor taxes or for capital income taxes.Explanation / Answer
Laffer curve shows tax revenue is increased with increase in tax rate and tax revenue is maximum at a certain tax rate after that it starts to fall with an increase in tax rate. In the US tax revenue can increase maximum by 30% by raising labor taxes after that it starts to fall. While in EU maximum increase of tax revenue is 8% after that it starts to fall. So in the US, there is a better scope of increasing tax revenue by increasing labor taxes. So the US is on the left side of Laffer curve for labor taxes.
The maximum increase in capital tax revenue is 6% in the US and 1% in EU. For both the economy the maximum point is very low. So both US and EU will be the right side of the Laffer curve for capital tax.
The third option is correct.
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