What is the revenue maximizing tax rate

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Reference no: EM131101499

In an economy, the labour supply curve is S = 5Wa, where wa is the after-tax wage rate. Assume that the before-tax wage rate is fixed at 10.

a. Derive an expression for tax revenues as a function of the tax rate.

b. If the current tax rate is 70%, is the government on the “good” side of the Laffer curve? (Use a graph in your answer, and explain what it means to be on the good side of the Laffer curve)

c. What is the elasticity of labour supply at the current tax rate?

d. What advice would you give the government if it is looking at possible tax re- forms?

Bonus: What is the revenue maximizing tax rate?

Reference no: EM131101499

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