An aggregate Laffer curve – a multi-peak case

Abstract

In the current paper we propose to distinguish between micro and aggregate Laffer functions. We prove that in spite of the fact that a Laffer curve of any representative individual may have one peak point where tax revenue is at its maximum, the aggregate Laffer curve is more likely to have multiple peaks. We show this for the case where there is a high degree of wage distribution inequality along with a backward bending supply curve of labor, which appears to be the case for many Western countries. Since this scenario is typical of many countries, the welfare implications of the multi-peak Laffer curve should be considered by the policy maker.