Tax Aversion, Laffer Curve, and the Self-financing of Tax Cuts

Abstract

High taxation is found to lead not to less labor supply but to more tax evasion and/or black labor. Investigating next what this implies for the course of the tax revenue and subsequently for the shape of the Laffer curve, this curve is found to change with the tax induced change of taxpayer preferences over tax compliance and tax aversion. Hence, the relevant Laffer curve when contemplating tax cuts should be the one after the last tax increase and cannot thereby be fully self-financed.