How Do Laffer Curves Differ Across Countries?
54 Pages Posted: 29 May 2012
Date Written: May 23, 2012
We seek to understand how Laffer curves differ across countries in the U.S. 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 curve, taxation, cross country comparison, debt sustainability, fiscal limits, quantitative endogenous growth, human capital, and labor taxation
JEL Classification: E0, E13, E2, E3, E62, H0, H2, H3, H6
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