The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve

28 Pages Posted: 11 Nov 2015 Last revised: 3 Jan 2019

See all articles by Alejandro Badel

Alejandro Badel

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Mark Huggett

Georgetown University - Department of Economics

Date Written: November, 2015

Abstract

We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models. One of the elasticities that enters our formula has been estimated in the elasticity of taxable income literature. We apply standard empirical methods from this literature to data produced by reforming the tax system in a model economy. We find that these standard methods underestimate the relevant elasticity in models with endogenous human capital accumulation.

Keywords: sufficient statistics, Laffer Curve, marginal tax rates, Elasticity

JEL Classification: D91, E21, H2, J24

Suggested Citation

Badel, Alejandro and Huggett, Mark, The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve (November, 2015). FRB St. Louis Working Paper No. 2015-38, Available at SSRN: https://ssrn.com/abstract=2688947

Alejandro Badel (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Mark Huggett

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-6683 (Phone)

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