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On the analytics of the dynamic Laffer curve

  • Agell, Jonas
  • Persson, Mats

In this paper, we analyze government budget balance within a simple model of endogenous growth. For the AK model, simple analytical conditions for a tax cut to be self-financing can be derived. The critical variable is not the tax rate per se, but the "transfer-adjusted tax rate". We discuss some conceptual issues in dynamic revenue analysis, and we explain why previous studies have arrived at seemingly contradictory results. Finally, we perform an empirical study of the transfer-adjusted tax rates of the OECD countries to see which country has the highest potential for fiscal improvements; it turns out that only a few countries have any potential for such "dynamic scoring".

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 48 (2001)
Issue (Month): 2 (October)
Pages: 397-414

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Handle: RePEc:eee:moneco:v:48:y:2001:i:2:p:397-414
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  2. Ellen R. McGrattan, 1998. "A defense of AK growth models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 13-27.
  3. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S126-50, October.
  4. Don Fullerton, 1980. "On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues," NBER Working Papers 0467, National Bureau of Economic Research, Inc.
  5. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
  6. Bianconi, Marcelo, 2000. "The effects of alternative fiscal policies on the intertemporal government budget constraint," International Review of Economics & Finance, Elsevier, vol. 9(1), pages 31-52, February.
  7. Bruce, Neil & Turnovsky, Stephen J, 1999. "Budget Balance, Welfare, and the Growth Rate: "Dynamic Scoring" of the Long-Run Government Budget," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 162-86, May.
  8. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
  9. Pecorino, Paul, 1995. "Tax rates and tax revenues in a model of growth through human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 527-539, December.
  10. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
  11. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  12. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
  13. Malcomson, James M., 1986. "Some analytics of the laffer curve," Journal of Public Economics, Elsevier, vol. 29(3), pages 263-279, April.
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