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How Do Laffer Curves Differ across Countries?

In: Fiscal Policy after the Financial Crisis

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Author Info

  • Mathias Trabandt
  • Harald Uhlig

Abstract

We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.

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This chapter was published in:

  • Alberto Alesina & Francesco Giavazzi, 2013. "Fiscal Policy after the Financial Crisis," NBER Books, National Bureau of Economic Research, Inc, number ales11-1, Ekim.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12638.

    Handle: RePEc:nbr:nberch:12638

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    1. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(2), pages 203-235, April.
    2. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    3. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
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    9. Richard Rogerson, 2007. "Taxation and market work: is Scandinavia an outlier?," Economic Theory, Springer, vol. 32(1), pages 59-85, July.
    10. Olivier Blanchard, 2004. "The Economic Future of Europe," NBER Working Papers 10310, National Bureau of Economic Research, Inc.
    11. Robert E. Hall, 2009. "Reconciling Cyclical Movements in the Marginal Value of Time and the Marginal Product of Labor," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 117(2), pages 281-323, 04.
    12. Lars Ljungqvist & Thomas J. Sargent, 2007. "Do Taxes Explain European Employment? Indivisible Labor, Human Capital, Lotteries, and Savings," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 181-246 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Alessandro Piergallini & Michele Postigliola, 2012. "Fiscal Policy and Public Debt Dynamics in Italy, 1861-2009," CEIS Research Paper 248, Tor Vergata University, CEIS, revised 27 Jul 2012.
    2. Murat Üngör, 2014. "Average effective tax rates on consumption for Turkey: New data and a comparative analysis," Economics Bulletin, AccessEcon, vol. 34(1), pages 567-580.
    3. Hugo Miguel de Oliveira Cruz Pinto de Abreu & Elísio Fernando Moreira Brandão & Samuel Cruz Alves Pereira, 2014. "Crossing Mountains: The Effect of Competition on the Laffer Curve," FEP Working Papers 523, Universidade do Porto, Faculdade de Economia do Porto.
    4. Henning Bohn, 2013. "Low Altruism, Austerity, and Aversion to Default: Are Countries Converging to the Natural Debt Limit?," CESifo Working Paper Series 4270, CESifo Group Munich.
    5. Lees, Kirdan, 2013. "Fighting fit? Assessing New Zealand’s fiscal sustainability," NZIER Working Paper 2013/5, New Zealand Institute of Economic Research.
    6. Liliana Bunescu & Carmen Comaniciu, 2013. "Graphical Analysis Of Laffer'S Theory For European Union Member States," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 16-23, April.

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