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How Do Laffer Curves Differ across Countries?

In: Fiscal Policy after the Financial Crisis

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  • 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, July.
    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. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 942-63, September.
    3. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 297-323, December.
    4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers, Federal Reserve Bank of Minneapolis 625, Federal Reserve Bank of Minneapolis.
    5. Richard Rogerson, 2007. "Taxation and market work: is Scandinavia an outlier?," Economic Theory, Springer, Springer, vol. 32(1), pages 59-85, July.
    6. 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.
    7. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(4), pages 3-26, Fall.
    8. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
    9. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
    10. Edward C. Prescott, 2003. "Why do Americans work so much more than Europeans?," Staff Report, Federal Reserve Bank of Minneapolis 321, Federal Reserve Bank of Minneapolis.
    11. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262025531, December.
    12. 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.
    13. Ljungqvist, Lars & Sargent, Thomas J, 2007. "Do Taxes Explain European Employment? Indivisible Labour, Human Capital, Lotteries and Savings," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6196, C.E.P.R. Discussion Papers.
    14. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 1-15, May.
    15. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
    16. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 1(1), pages 280-97, January.
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    Cited by:
    1. Lees, Kirdan, 2013. "Fighting fit? Assessing New Zealand’s fiscal sustainability," NZIER Working Paper, New Zealand Institute of Economic Research 2013/5, New Zealand Institute of Economic Research.
    2. 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, Universidade do Porto, Faculdade de Economia do Porto 523, Universidade do Porto, Faculdade de Economia do Porto.
    3. Murat Ungor, 2014. "Average Effective Tax Rates on Consumption for Turkey : New Data and a Comparative Analysis," CBT Research Notes in Economics, Research and Monetary Policy Department, Central Bank of the Republic of Turkey 1402, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    4. Piergallini Alessandro & Postigliola Michele, 2012. "Fiscal Policy and Public Debt Dynamics in Italy, 1861-2009," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 417-440.
    5. 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.
    6. 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.

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