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How Far Are We From the Slippery Slope? The Laffer Curve Revisited

  • Trabandt, Mathias
  • Uhlig, Harald

The goal of this paper is to examine the shape of the Laffer curve quantitatively in a simple neoclassical growth model calibrated to the US as well as to the EU-15 economy. We show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. Our results indicate that since 1975 the EU-15 area has moved considerably closer to the peaks of their Laffer curves. We find that the slope of the Laffer curve in the EU-15 economy is much flatter than in the US which documents a much higher degree of distortions in the EU-15 area. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5657.

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Date of creation: May 2006
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Handle: RePEc:cpr:ceprdp:5657
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