The Laffer curve in schedular multi-rate income taxes with non-genuine allowances: An application to Spain

- Proposed model locates individual taxpayers on the entire range of the Laffer curve.
- The Laffer curve is derived by confronting the mechanical and behavioural effects.
- The Laffer curve depends heavily on the complexity of the tax structure.
- The Laffer curve is intrinsically an individual microeconomic issue.
- The aggregate Laffer curve is a manufactured device of limiting practical use.

This paper models the connection between tax revenue and marginal tax rates in modern personal income taxes. In so doing, new analytical expressions for the elasticity of tax revenue to tax rates are derived taking into account global and schedular income taxes in the presence of non-standard allowances. Based on these new analytical elasticities the implicit Laffer curve is characterised and explored in detail. Calculations are performed for the individual taxpayer and the aggregate population. When applied to microdata, the model permits us to locate individually the position of every taxpayer on the entire range of the Laffer curve as well as to characterise the “representative” aggregate Laffer curve. The utility of the model to forecast revenue is illustrated by applying it to Spanish personal income tax. The model confirms that the Laffer curve is essentially an intrinsic individual matter although a virtual aggregate Laffer curve for the whole population can be inferred.