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

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