| Abstract: | Summary On the basis of a simple general equilibrium model calculations are made of the welfare cost of higher tax rates. Furthermore, the Laffer curve for The Netherlands is estimated. Taking 1970 as the basic year and assuming that all tax revenues were paid back in lump-sum benefits, the Laffer curve topped at a marginal rate of 66.9076 and theMEB stood at 1.24. This means that an additional guilder in tax revenues involves a welfare loss of Dfl. 1.24 on top of the direct tax burden. Considering the true proportion of government income being spent on benefits, the Laffer curve is found at a marginal tax-rate of 70.1016. In that case theMEB amounts to 0.83 in 1970. The most striking finding was the sharp rise in theMEB, from 0.83 in 1970 to 6.36 in 1985. This high welfare cost is an indication that The Netherlands is nearing the limits of taxation on income. It is found that market signals are disturbed most when tax revenues are used for income transfers in a form which does not influence allocation decisions at the margin (lump-sum benefits). In that case relative prices are affected, whereas income effects are neutralized.The authors wish to thank Professor F. W. Rutten, J. van Sinderen and other colleagues at the Directorate for Macro-economic Policy of the Ministry of Economic Affairs for their stimulating support and critical remarks. J. Hulsman translated the original Dutch draft. |
