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Estimating the Laffer tax rate on capital income: cross‐base responses matter!

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  • Marie‐Noëlle Lefebvre
  • Etienne Lehmann
  • Michaël Sicsic

Abstract

We express the Laffer tax rate on capital income using direct elasticity (capital income response) and cross‐elasticity (labor income response) to the net‐of‐tax rate on capital income. We estimate these elasticities using salient capital tax reforms that took place in France between 2008 and 2017. We use graphical analysis and instrumental variable estimates to confirm significant responses of capital and labor incomes. Both methods lead to positive labor responses, contrary to income‐shifting predictions. Omitting cross‐elasticity suggests a Laffer rate around 57 percent. However, incorporating our positive cross‐elasticity estimate lowers the rate to about 43 percent, taking labor income tax into account.

Suggested Citation

  • Marie‐Noëlle Lefebvre & Etienne Lehmann & Michaël Sicsic, 2025. "Estimating the Laffer tax rate on capital income: cross‐base responses matter!," Scandinavian Journal of Economics, Wiley Blackwell, vol. 127(2), pages 460-489, April.
    • Handle: RePEc:bla:scandj:v:127:y:2025:i:2:p:460-489
    DOI: 10.1111/sjoe.12578
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    Cited by:

    1. is not listed on IDEAS
    2. Ana Gamarra Rondinel & José Félix Sanz-Sanz & María Arrazola, 2025. "Correction to: The individual Laffer curve: evidence from the Spanish income tax," Empirical Economics, Springer, vol. 68(3), pages 1495-1495, March.
    3. Laurence Jacquet & Etienne Lehmann, 2025. "Generalized Production Efficiency," Working Papers hal-04954501, HAL.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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