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Dynamic Laffer Curves

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Author Info
Alfonso Novales (Departamento de Economía Cuantitativa, Universidad Complutense de Madrid)
Jesús Ruiz (Departamento de Análisis e Historia Económica, Universidad Autónoma de Barcelona,)

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Abstract

In an endogenous growth model with human capital accumulation, we discuss the possibility of welfare improving changes on the 1scal policy stance in some actual economies. First, we characterize the extent to which the initial fall in revenues produced by a permanent tax cut can be compensated by an increase in the tax base, due to a dynamic La#er curve efect, showing that there is, in fact, a non-trivial margin for substituting debt for taxes on labor and capital income. Second, we show that the largest feasible reduction in labor income tax rates may easily produce a higher welfare gain than the largest feasible reduction in capital income tax rates. Two qualifications: (a) feasible tax cuts exist only for a relatively high elasticity of intertemporal substitution of consumption, and (b) the preference for the largest feasible tax cut on labor income rather than that on capital income reverses for a low appreciation for leisure, relative to consumption, in the preferences of the representative agent.

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Publisher Info
Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0106.

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Date of creation: 2001
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Handle: RePEc:ucm:doicae:0106

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  1. Fredriksson, Anders, 2007. "Compositional and dynamic Laffer effects in models with constant returns to scale," Research Papers in Economics 2007:2, Stockholm University, Department of Economics, revised 21 Apr 2007. [Downloadable!]
  2. Alan Krause, 2007. "A Tax Reform Analysis of the Laffer Argument," Discussion Papers 07/10, Department of Economics, University of York. [Downloadable!]
  3. Eric M. Leeper & Shu-Chun Susan Yang, 2006. "Dynamic Scoring: Alternative Financing Schemes," Caepr Working Papers 2006-022, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
    Other versions:
  4. Wouter J. DenHaan, 2002. "Temporary Shocks and Unavoidable Transistions to a High-Unemployment Regime," NBER Working Papers 9349, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Den Haan, Wouter, 2003. "Temporary Shocks and Unavoidable Transitions to a High-Unemployment Regime," CEPR Discussion Papers 3704, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  7. Esther Fernández & Rafaela Pérez Sánchez & Jesús Ruiz, 2004. "Double Dividend in an Endogenous Growth Model with Pollution and Abatement," Economic Working Papers at Centro de Estudios Andaluces E2004/15, Centro de Estudios Andaluces. [Downloadable!]
  8. Wouter J. den Haan, 2003. "Temporary shocks and unavoidable transitions to a high-unemployment regime," Working Paper Series 239, European Central Bank. [Downloadable!]
  9. Alejandro Cuñat & Szabolcs Deák & Marco Maffezzoli, . "Tax Cuts in Open Economies," Working Papers 332, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  10. N. Gregory Mankiw & Matthew Weinzierl, 2004. "Dynamic Scoring: A Back-of-the-Envelope Guide," NBER Working Papers 11000, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Alejandro Cuñat & Szabolcs Deak & Marco Maffezzoli, 2008. "Tax Cuts in Open Economies," CEP Discussion Papers dp0860, Centre for Economic Performance, LSE. [Downloadable!]
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