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How Do Laffer Curves Differ Across Countries?

45 Pages Posted: 17 Feb 2012  

Mathias Trabandt

Board of Governors of the Federal Reserve System; Sveriges Riksbank

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: February 14, 2012

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-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: cross country comparison, debt sustainability, fiscal limits

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

Suggested Citation

Trabandt, Mathias and Uhlig, Harald, How Do Laffer Curves Differ Across Countries? (February 14, 2012). Becker Friedman Institute for Research in Economics Working Paper No. 2012-001. Available at SSRN: https://ssrn.com/abstract=2005876 or http://dx.doi.org/10.2139/ssrn.2005876

Mathias Trabandt

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 (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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