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Laffer strikes again: Dynamic scoring of capital taxes

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  • Strulik, Holger
  • Trimborn, Timo

Abstract

We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70–90% and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3–1.2% after abolishment of the tax.

Suggested Citation

  • Strulik, Holger & Trimborn, Timo, 2012. "Laffer strikes again: Dynamic scoring of capital taxes," European Economic Review, Elsevier, vol. 56(6), pages 1180-1199.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:6:p:1180-1199
    DOI: 10.1016/j.euroecorev.2012.05.002
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    Cited by:

    1. Salvador Barrios & Mathias Dolls & Anamaria Maftei & Andreas Peichl & Sara Riscado & Janos Varga & Christian Wittneben, 2016. "Dynamic scoring of tax reforms in the European Union," JRC Working Papers on Taxation & Structural Reforms 2016-03, Joint Research Centre (Seville site).
    2. Strulik, Holger & Trimborn, Timo, 2011. "The Dark Side of Fiscal Stimulus," Hannover Economic Papers (HEP) dp-466, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. Kelbesa Abdisa Megersa, 2015. "The laffer curve and the debt-growth link in low-income Sub-Saharan African economies," Journal of Economic Studies, Emerald Group Publishing, vol. 42(5), pages 878-892, October.
    4. Schünemann, Johannes & Trimborn, Timo, 2017. "Boosting taxes for boasting about houses: Status concerns in the housing market," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 05/2017, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    5. repec:got:cegedp:150 is not listed on IDEAS
    6. Strulik, Holger & Trimborn, Timo, 2014. "Natural disasters and macroeconomic performance: The role of residential investment," Center for European, Governance and Economic Development Research Discussion Papers 194, University of Goettingen, Department of Economics.
    7. Stanisław Cichocki & Ryszard Kokoszczyński, 2016. "The evolution of the Laffer curve as a framework for studying tax evasion: from simple theoretical to DSGE models," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 45.
    8. Strulik, Holger & Trimborn, Timo, 2016. "Natural disasters and macroeconomic performance," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 07/2016, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    9. Ritwik Banerjee, 2013. "An Evaluation of the Revenue side as a source of fiscal consolidation in high debt economies," Economics Working Papers 2013-23, Department of Economics and Business Economics, Aarhus University.
    10. Choi, Yoonseok & Kim, Sunghyun, 2016. "Dynamic scoring of tax reforms in a small open economy model," Economic Modelling, Elsevier, vol. 58(C), pages 182-193.
    11. repec:bla:germec:v:18:y:2017:i:2:p:154-181 is not listed on IDEAS
    12. Houndonougbo, Ahiteme N. & Mohsin, Mohammed, 2016. "Macroeconomic effects of cost equivalent business fiscal incentives," Economic Modelling, Elsevier, vol. 56(C), pages 59-65.
    13. Peter Oudheusden, 2016. "Fiscal policy reforms and dynamic Laffer effects," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 490-521, June.
    14. van Oudheusden, P., 2012. "Dynamic Scoring Through Creative Destruction," Discussion Paper 2012-084, Tilburg University, Center for Economic Research.
    15. Tsuchiya, Yoichi, 2016. "Dynamic Laffer curves, population growth and public debt overhangs," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 40-52.
    16. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.

    More about this item

    Keywords

    Corporate taxation; Capital gains; Tax allowances; Revenue estimation; Laffer curve; Dynamic scoring;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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