Working Paper: CEPR ID: DP5657
Authors: Mathias Trabandt; Harald Uhlig
Abstract: 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.
Keywords: Laffer curve; US; EU15 economy
JEL Codes: E0; E60; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positioning on the Laffer curve (H21) | Risk of diminishing returns from tax increases (H31) |
| Positioning on the Laffer curve (H21) | Economic distortions (H31) |
| Tax rates (H29) | Government revenue (H27) |
| Tax rates (H29) | Economic distortions (H31) |
| Labor tax cut (H31) | Self-financing in the EU15 (H69) |
| Capital tax cut (H29) | Self-financing in the EU15 (H69) |