The Laffer Curve Decomposed

The paper analyses the models of the Laffer curve addressed in the academic literature and strives to explain the effects which can exist in relation with the original curve and the one modified by other academicians. The effects are decomposed in a theoretical manner and statistically tested thereafter with a dataset covering the period 2000 – 2012 consisting of data for Belgium, Denmark, Finland, France, Ireland, Italy, Luxembourg, Germany, the Netherlands, Portugal, Austria, Greece, United Kingdom, Spain, Sweden, the Czech Republic, Estonia, Hungary, Norway, Poland, the Slovak Republic and Slovenia. The main value added of the paper lies in the outcomes of the cross-sectional panel data regression testing the model derived from the theoretical decomposition of the curve as well as graphical expression of the particular effects. Based on the result of the analysis only a few of the decomposed effects could have been observed mainly the originally anticipated negative correlation of tax base and tax rate, positive correlation of labor productivity and tax base or negative correlation of tax base and unemployment level. Other effects (grey economy, tax competition, government spending, etc.) were not proven.