Compositional and dynamic Laffer effects in models with constant returns to scale
AbstractThere is a renewed interest in the dynamic effects of tax cuts on government revenue. The possibility of tax cuts paying for themselves over time definitely seems like an attractive option for policy makers. This paper looks at what conditions are required for reductions in capital taxes to be fully self-financing. This is done in a model with constant returns to scale in broad capital. Such a framework exhibits growth; the scope for self-financing tax cuts is therefore different than in the neoclassical growth model, most recently studied by Mankiw and Weinzierl (2006). Compared to previous literature, I make a methodological contribution in the definition of "Laffer effects" and clarify the role of compositional and dynamic effects in making tax cuts self-financing. I also provide simple analytical expressions for what tax rates are required for tax cuts to be fully self-financing. The results show that large distortions are required to get Laffer effects. Introducing a labor/leisure choice into the model opens up a new avenue for such effects, however.
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Bibliographic InfoPaper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2007:2.
Length: 34 pages
Date of creation: 23 Feb 2007
Date of revision: 21 Apr 2007
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Human capital; compositional effects from taxation; dynamic effects from taxation; Laffer effect; dynamic scoring;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-03 (All new papers)
- NEP-DGE-2007-03-03 (Dynamic General Equilibrium)
- NEP-MAC-2007-03-03 (Macroeconomics)
- NEP-PBE-2007-03-03 (Public Economics)
- NEP-PUB-2007-03-03 (Public Finance)
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