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

  • Mathias Trabandt
  • Harald Uhlig

We compare Laffer curves for labor and capital taxation for the US, the EU-14 and individual European countries, using a neoclassical growth model featuring "constant Frisch elasticity" (CFE) preferences. We provide new tax rate data. The US can increase tax revenues by 30% by raising labor taxes and by 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Dynamic scoring for the EU-14 shows that 54% of a labor tax cut and 79% of a capital tax cut are self-financing. The Laffer curve in consumption taxes does not have a peak. Endogenous growth and human capital accumulation locates the US and EU-14 close to the peak of the labor tax Laffer curve. We derive conditions under which household heterogeneity does not matter much for the results. By contrast, transition effects matter: a permanent surprise increase in capital taxes always raises tax revenues.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15343.

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Date of creation: Sep 2009
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Publication status: published as "The Laffer Curve Revisited," with Mathias Trabandt, Journal of Monetary Economics, Volume 58, Issue 4, May 2011, pp. 305-327.
Handle: RePEc:nbr:nberwo:15343
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