The Binary Choice Approach of Laffer Curve

The paper analyzes empirically, based on “Laffer effects”, in Romania’s case, the relationship between tax revenues (dependent variable) and tax rates (independent variables). The analysis is based on the construction of a binary choice model (Linear Probit Model) and the data set is covering the period 1999 - 2009 (first trimester), with quarterly frequency. The main results show that the two “Laffer effects” have a different probability of existence. If the government knows which the maximum probabilities are for each of the two effects, then he can construct a coherent tax policy arrangement that raise or decrease the tax revenues, based on flat or progressive tax systems (the tax evasion is considered to be constant).