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How Do Laffer Curves Differ Across Countries?

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  • Mathias Trabandt

    ()
    (Board of Governors of the Federal Reserve System)

  • Harald Uhlig

    (University of Chicago)

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-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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Bibliographic Info

Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2012-001.

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Date of creation: 2012
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Handle: RePEc:bfi:wpaper:2012-001

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Keywords: Laffer curve; taxation; cross-country comparison; debt sustainability; fiscal limits;

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References

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  1. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, December.
  2. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13.
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  6. Mathias Trabandt & Harald Uhlig, 2009. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," NBER Working Papers 15343, National Bureau of Economic Research, Inc.
  7. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall.
  8. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. 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.
  11. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
  12. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
  13. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  14. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  15. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 203-235, April.
  16. 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, vol. 117(2), pages 281-323, 04.
  17. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
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Cited by:
  1. 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.
  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 523, Universidade do Porto, Faculdade de Economia do Porto.
  3. 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.
  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. Lees, Kirdan, 2013. "Fighting fit? Assessing New Zealand’s fiscal sustainability," NZIER Working Paper 2013/5, New Zealand Institute of Economic Research.
  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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