Economics of Taxes

I do not support "supply-side" economics, but Arthur Laffer made an interesting point when he created the Laffer Curve. As you can see in the figure I, it will create deadweight loss when the government levies taxes. Who pays taxes depends on elasticity of supply and demand and always inelastic one bears larger share of burden of taxes. The second figure is the Laffer Curve.

At 100% tax rate, the tax revenue will become zero because nobody will work or produce because people expect the government will take all; it becomes zero as well at zero rate simply because the government collects nothing. Therefore, we can conclude that the optimal tax rate exists somewhere between zero and one hundred. If we are on the right hand of the curve, then reducing tax rates will lead to a bigger revenue. What if we are on the left hand? Then, it implies the government will raise tax revenue by increasing tax rates. (However, Laffer has never pulled this one because of political reason. He's always only emphasized tax-cuts.)
As you can see in the figure one, revenue loss from tax-cuts may be larger than revenue gain. That's exactly what happened in the U.S. during the Republican Administrations since 1981. Cutting taxes recklessly while raising spending level does harm the economy. Then, what would be the optimal tax policy? I got a hint from Sweden. Sweden has a relatively low flat corporate income tax rate while personal income taxes and value-added tax rates are relatively high. Why do they have that kind of system?
First, if a country engages in free capital mobility across borders, corporations do not bear burden of the tax and simply it will be shifted to employees, consumers and domestic depositors. A simple reason. As you can see in the figure III, the supply curve of capital is perfectly elastic with perfect capital mobility.

With higher corporate tax rates, they will invest less here and more in jurisdictions where corporate tax rates are lower. Therefore, they do not pay the tax. What about personal income taxes? Labour is less mobile than capital. There are language and cultural barriers as well as legal barriers like immigration regulations, which are presumably stricter than cross-border investment regulations. As a result, labour supply is relatively inelastic. An interesting fact on the relationship between tax incidence and elasticity is the more inelastic the smaller deadweight loss. It means that even if the government levies relatively high rates of personal income taxes, it will unlikely cause such a big efficiency loss. Who bears the burden? Of course, workers, as you can see in the figure IV, because the labour supply is inelastic. (I made up an extreme case for simplicity here.) What about value-added taxes? The same reasoning applies. Since the demand for necessities is very inelastic, levying VAT on those will not create a big mess. So, some lessons: lower corporate income taxes and raise personal income taxes and VAT.