(213e) Tax Revenue Laffer Curve from Thermodynamics Perspective

It has been a long tradition of economists and scientists making parallel analogy between economics and thermodynamics, establishing phenomenological theory of economic systems. In this contribution, the proposed economic temperature and economic entropy identification and subsequently developed economic production and growth models were used to obtain the quantitative relationship between tax revenue, payroll tax as well as corporate/personal income tax, and the wealth creation efficiency of an economic entity. The derived expression for corporate/personal income tax exhibits a quadratic dependence of wealth creation efficiency and tax rate, which agrees well with the famous tax revenue Laffer curve—There are always two tax rates that yield the same revenues. The expression also indicates that the wealth creation efficiency improvement plays a pivotal role in the pay off of the revenue lost by prior tax rate cut. The derived mathematical revenue expression together with the proposed monetary rule may be used for future fiscal policy design and optimization.