The Laffer Curve in an Incomplete-Market Economy
AbstractThis paper is a quantitative investigation into the characteristics of the Laffer curve in a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents. We show that the shape of the Laffer curves related to taxes on labor, capital and consumption dramatically changes depending on which of transfers or government debt are adjusted to make the government budget constraint hold. When transfers are adjusted, the Laffer curve has the traditional shape. However, when debt is adjusted, the Laffer curve looks like a horizontal S, in which case fiscal revenues can be associated with up to three diferent levels of taxation. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete.
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 707.
Date of creation: Apr 2012
Date of revision: Jul 2013
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Laffer Curve; Incomplete Market; Labor Supply; Precautionary Savings; Public Debt;
Other versions of this item:
- Fève, P. & Matheron, J. & Sahuc,J-G., 2013. "The Laffer Curve in an Incomplete-Market Economy," Working papers 438, Banque de France.
- Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2012. "The Laffer Curve in an Incomplete-Market Economy," TSE Working Papers 12-288, Toulouse School of Economics (TSE), revised Jul 2013.
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-23 (All new papers)
- NEP-DGE-2012-04-23 (Dynamic General Equilibrium)
- NEP-MAC-2012-04-23 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Fiscal Policy with Heterogeneous Agents and Incomplete Markets,"
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- Heathcote, Jonathan, 2001. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers 01-03, Duke University, Department of Economics.
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- Alonso-Ortiz, Jorge & Rogerson, Richard, 2010.
"Taxes, transfers and employment in an incomplete markets model,"
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- Jorge Alonso-Ortiz & Richard Rogerson, 2010. "Taxes, transfers, and employment in an incomplete markets model," CQER Working Paper 2010-07, Federal Reserve Bank of Atlanta.
- Javier Díaz-Giménez & Andrew Glover & José-Víctor Ríos-Rull, 2011. "Facts on the distributions of earnings, income, and wealth in the United States: 2007 update," Quarterly Review, Federal Reserve Bank of Minneapolis.
- Sigrid Röhrs & Christoph Winter, 2011. "Wealth inequality and the optimal level of government debt," ECON - Working Papers 051, Department of Economics - University of Zurich.
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