How Far are We from the Slippery Slope? The Laffer Curve Revisited

84 Pages Posted: 15 Sep 2009 Last revised: 15 Oct 2009

See all articles by Mathias Trabandt

Mathias Trabandt

Board of Governors of the Federal Reserve System; Sveriges Riksbank

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: September 2009

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.

Suggested Citation

Trabandt, Mathias and Uhlig, Harald, How Far are We from the Slippery Slope? The Laffer Curve Revisited (September 2009). NBER Working Paper No. w15343, Available at SSRN: https://ssrn.com/abstract=1472281

Mathias Trabandt (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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