From my forums, but thought blog readers may be interested…
For those new to economics the laffer curve can be read-about here: http://en.wikipedia.org/wiki/Laffer_curve
I’m not going to debate the validity of the theory, merely describe how it is implemented (and adjustable/moddable) within the game.
Basically the laffer curve is saying that higher taxes may bring in less income than lower taxes, at some ‘hard-to-define’ point. In other words, you can set the tax rate *too high* if you goal is to raise money for the state. At first glance it may look like the laffer curve is not modeled in Democracy 3, but it is. If you look at the slider for income tax, you will see that at high levels, it brings in more money than at lower levels, which might seem to imply a non-laffer simulation. However, the values shown below the slider are simple calculations, not forecasts based on full models.
If you set income tax punishingly high, more income will be raised, in the immediate term. However, this high rate also acts as an input to ‘bad’ situations such as brain drain (I can see an argument for suggesting it should affect corporate exodus too). If the brain drain kicks in, there will be noticeable hit to GDP (12%!). This lower GDP will affect income raised by the tax, because almost all taxes in the game are in some way scaled by GDP, in terms of what income they raise. Therefore, it is entirely possible (and indeed likely) that when looked over a medium to long term, a higher tax rate brings in less revenue. Of course, this is only one argument. You may wish for higher income tax rates for non-revenue reasons such as political popularity with socialists or a more equal society.
So in short, the laffer curve is in the game, albeit in a fairly complex and ‘binary’ way. You could easily make a ‘laffer mod’ that more directly introduced a gentle curve to GDP from higher rates of income tax, without using the situation-triggering mechanism.
Hopefully that makes sense :D