How Far are We from the Slippery Slope? The Laffer Curve Revisited

SFB 649 Discussion Paper No. 2006-023

69 Pages Posted: 13 Apr 2006

See all articles by Harald Uhlig

Harald Uhlig

University of Chicago - Department of Economics

Mathias Trabandt

Board of Governors of the Federal Reserve System; Sveriges Riksbank

Multiple version iconThere are 5 versions of this paper

Date Written: April 3, 2006

Abstract

The goal of this paper is to examine the shape of the Laffer curve quantitatively in a simple neoclassical growth model calibrated to the US as well as to the EU-15 economy. We show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. Our results indicate that since 1975 the EU-15 area has moved considerably closer to the peaks of their Laffer curves. We find that the slope of the Laffer curve in the EU-15 economy is much flatter than in the US which documents a much higher degree of distortions in the EU-15 area. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy.

Keywords: Laffer curve, US and EU-15 economy

JEL Classification: E0, E60, H0

Suggested Citation

Uhlig, Harald and Trabandt, Mathias, How Far are We from the Slippery Slope? The Laffer Curve Revisited (April 3, 2006). SFB 649 Discussion Paper No. 2006-023, Available at SSRN: https://ssrn.com/abstract=895479 or http://dx.doi.org/10.2139/ssrn.895479

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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

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