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How Far Are We From The Slippery Slope? The Laffer Curve Revisited

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  • Mathias Trabandt
  • Harald Uhlig

Abstract

We compare Laffer curves for labor and capital taxation for the US, the EU-14 and individual European countries, using a neoclassical growth model featuring "constant Frisch elasticity" (CFE) preferences. We provide new tax rate data. The US can increase tax revenues by 30% by raising labor taxes and by 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Dynamic scoring for the EU-14 shows that 54% of a labor tax cut and 79% of a capital tax cut are self-financing. The Laffer curve in consumption taxes does not have a peak. Endogenous growth and human capital accumulation locates the US and EU-14 close to the peak of the labor tax Laffer curve. We derive conditions under which household heterogeneity does not matter much for the results. By contrast, transition effects matter: a permanent surprise increase in capital taxes always raises tax revenues.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15343.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15343

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  1. A new look at the Laffer curve
    by Economic Logician in Economic Logic on 2009-10-20 14:35:00
  2. The sum of all right-wing assumptions
    by Noah in Noahpinion on 2011-07-12 13:30:00
  3. Looking for a Laffer curve
    by chris dillow in Stumbling and Mumbling on 2006-07-17 11:27:55
  4. Ridurre le tasse si deve
    by Renzo Orsi, Davide Raggi e Francesco Turrino in La Voce on 2013-12-13 07:17:18
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