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

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: Laffer curve, dynamic scoring, human capital, heterogeneity, transition

JEL Classification: E0, E13, E2, E3, E62, H0, H2, H3, H6

Suggested Citation: Suggested Citation

Uhlig, Harald and Trabandt, Mathias, How Far are We from the Slippery Slope? The Laffer Curve Revisited (April 2011). MFI Working Paper No. 2009-005, Available at SSRN: https://ssrn.com/abstract=1533409 or http://dx.doi.org/10.2139/ssrn.1533409