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 Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-288.
Date of creation: Apr 2012
Date of revision: Jul 2013
Other versions of this item:
- Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2012. "The Laffer Curve in an Incomplete-Market Economy," IDEI Working Papers 707, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2013.
- FÃ¨ve, P. & Matheron, J. & Sahuc,J-G., 2013. "The Laffer Curve in an Incomplete-Market Economy," Working papers, Banque de France 438, Banque de France.
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H6 - Public Economics - - National Budget, Deficit, and Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-DGE-2012-05-08 (Dynamic General Equilibrium)
- NEP-MAC-2012-05-08 (Macroeconomics)
- NEP-PBE-2012-05-08 (Public Economics)
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