Working Paper: NBER ID: w17862
Authors: Mathias Trabandt; Harald Uhlig
Abstract: We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.
Keywords: Laffer curves; taxation; government spending; fiscal limits; sovereign debt; monopolistic competition
JEL Codes: E0; E13; E2; E3; H0; H2; H3; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor income and consumption taxes (H31) | cross-country differences in Laffer curves (H21) |
| tax structure (H20) | government revenue capabilities (H29) |
| introduction of monopolistic competition (L13) | fit to the data (C52) |
| calibration in 2010 (C13) | peak of the labor tax Laffer curve (H21) |
| labor tax adjustments (J39) | maximum sustainable interest rate on government debt (E43) |