Working Paper: NBER ID: w15343
Authors: Mathias Trabandt; Harald Uhlig
Abstract: 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.
Keywords: No keywords provided
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 |
|---|---|
| Tax rates (H29) | Tax revenues (H29) |
| Labor tax cut (H31) | Tax revenues (H29) |
| Capital tax cut (H29) | Tax revenues (H29) |
| Capital tax rates (H29) | Tax revenues (H29) |
| Permanent surprise increase in capital taxes (F38) | Tax revenues (H29) |
| Consumption taxes (H29) | Tax revenues (H29) |