IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w15343.pdf
Download Restriction: no

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

as
in new window

Length:
Date of creation: Sep 2009
Date of revision:
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
Note: EFG PE
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
  2. Alberto Alesina & Edward L. Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U.S. and Europe: Why So Different?," NBER Working Papers 11278, National Bureau of Economic Research, Inc.
  3. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, June.
  4. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
  5. Novales, Alfonso & Ruiz, Jesus, 2002. "Dynamic Laffer curves," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 181-206, December.
  6. David Carey & Josette Rabesona, 2002. "Tax Ratios on Labour and Capital Income and on Consumption," OECD Economic Studies, OECD Publishing, vol. 2002(2), pages 129-174.
  7. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers 625, Federal Reserve Bank of Minneapolis.
  8. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2004. "Time-Consistent Public Expenditures," Levine's Bibliography 122247000000000652, UCLA Department of Economics.
  9. Prescott, Edward C., 2004. "The Transformation of Macroeconomic Policy and Research," Nobel Prize in Economics documents 2004-7, Nobel Prize Committee.
  10. James P. Ziliak & Thomas J. Kniesner, 2005. "The Effect of Income Taxation on Consumption and Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 769-796, October.
  11. R. Anton Braun & Harald Uhlig, 2006. "The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsuarable, Idiosyncratic Risk," CARF F-Series CARF-F-074, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  12. Robert J. Barro & Rachel McCleary, 2003. "Religion and Economic Growth," NBER Working Papers 9682, National Bureau of Economic Research, Inc.
  13. Agell, Jonas & Persson, Mats, 2000. "On the Analytics of the Dynamic Laffer Curve," Working Paper Series 2000:5, Uppsala University, Department of Economics.
  14. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  15. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall.
  16. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 1995. "Supply side interventions and redistribution," Economics Working Papers 115, Department of Economics and Business, Universitat Pompeu Fabra.
  17. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  18. Steven P. Cassou & Kevin J. Lansing, 2006. "Tax Reform with Useful Public Expenditures," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 631-676, October.
  19. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  20. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  21. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
  22. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  23. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, vol. 33(2), pages 173-206, July.
  24. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November.
  25. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
  26. N. Gregory Mankiw & Matthew Weinzierl, 2004. "Dynamic Scoring: A Back-of-the-Envelope Guide," NBER Working Papers 11000, National Bureau of Economic Research, Inc.
  27. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 203-235, April.
  28. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
  29. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
  30. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  31. Mathias Trabandt, 2006. "Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending," 2006 Meeting Papers 668, Society for Economic Dynamics.
  32. Ljungqvist, Lars & Sargent, Thomas J, 2007. "Do Taxes Explain European Employment? Indivisible Labour, Human Capital, Lotteries and Savings," CEPR Discussion Papers 6196, C.E.P.R. Discussion Papers.
  33. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  34. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05.
  35. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
  36. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
  37. Jinill Kim & Sunghyun Henry Kim, 2003. "Welfare effects of tax policy in open economies: stabilization and cooperation," Finance and Economics Discussion Series 2003-51, Board of Governors of the Federal Reserve System (U.S.).
  38. Christopher Pissarides & Rachel Ngai, 2009. "Welfare Policy and the Sectoral Distribution of Employment," 2009 Meeting Papers 191, Society for Economic Dynamics.
  39. Chryssi Giannitsarou, 2004. "Supply-side reforms and learning dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 36, Money Macro and Finance Research Group.
  40. Matthew D. Shapiro & Christopher L. House, 2006. "Phased-In Tax Cuts and Economic Activity," American Economic Review, American Economic Association, vol. 96(5), pages 1835-1849, December.
  41. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.
  42. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  43. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  44. Correia, I. & Rabelo, S. & Naves, J.C., 1994. "Business Cycles in a Small Open Economy," RCER Working Papers 382, University of Rochester - Center for Economic Research (RCER).
  45. Domeij, David & Klein, Paul, 2005. "Preannounced Optimal Tax Reform," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 150-169, April.
  46. Robert E. Hall, 2009. "Reconciling Cyclical Movements in the Marginal Value of Time and the Marginal Product of Labor," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 281-323, 04.
  47. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  48. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  49. Jonsson, Magnus & Klein, Paul, 2003. "Tax distortions in Sweden and the United States," European Economic Review, Elsevier, vol. 47(4), pages 711-729, August.
  50. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13.
  51. Kjetil Storesletten & Gianluca Violante & Jonathan Heathcote, 2012. "Redistributive Taxation in a Partial Insurance Economy," 2012 Meeting Papers 588, Society for Economic Dynamics.
  52. Eric Leeper & Tack Yun, 2006. "Monetary-fiscal policy interactions and the price level:Background and beyond," International Tax and Public Finance, Springer, vol. 13(4), pages 373-409, August.
  53. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
  54. Leeper, Eric M. & Yang, Shu-Chun Susan, 2008. "Dynamic scoring: Alternative financing schemes," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 159-182, February.
  55. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  56. Ellen R. McGrattan & Richard Rogerson, 2004. "Changes in hours worked, 1950?2000," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 14-33.
  57. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  58. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  59. Kevin J. Lansing, 1998. "Optimal Fiscal Policy in a Business Cycle Model with Public Capital," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 337-364, May.
  60. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  61. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  62. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
  63. Flodén, Martin & Linde, Jesper, 1998. "Idiosyncratic Risk in the U.S. and Sweden: Is there a Role for Government Insurance?," Seminar Papers 654, Stockholm University, Institute for International Economic Studies.
  64. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
  65. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  66. 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.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Economic Logic blog

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:15343. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.