Identifying Laffer Bounds: A Sufficient‐Statistics Approach with an Application to Germany

20 Pages Posted: 17 Nov 2016

See all articles by Normann Lorenz

Normann Lorenz

University of Trier

Dominik Sachs

European University Institute; Centre for Economic Policy Research (CEPR)

Date Written: October 2016

Abstract

We derive a simple sufficient‐statistics test for whether a nonlinear tax‐transfer system is second‐best Pareto efficient. If it is not, then it is beyond the top of the Laffer curve and there exists a tax cut that is self‐financing. The test depends on the income distribution, extensive and intensive labor supply elasticities, and income effect parameters. A tax‐transfer system is likely to be inefficient if marginal tax rates are quickly falling in income. We apply this test to the German tax‐transfer system, and we find that the structure of effective marginal tax rates is likely to be inefficient in the region where transfers are phased out.

Keywords: Extensive margin, income taxation, Laffer curve, Pareto efficiency

JEL Classification: H21, H23

Suggested Citation

Lorenz, Normann and Sachs, Dominik, Identifying Laffer Bounds: A Sufficient‐Statistics Approach with an Application to Germany (October 2016). The Scandinavian Journal of Economics, Vol. 118, Issue 4, pp. 646-665, 2016. Available at SSRN: https://ssrn.com/abstract=2870832 or http://dx.doi.org/10.1111/sjoe.12170

Normann Lorenz (Contact Author)

University of Trier ( email )

Dominik Sachs

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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