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

68 Pages Posted: 27 Jul 2006

See all articles by Harald Uhlig

Harald Uhlig

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Mathias Trabandt

Goethe University in Frankfurt

Multiple version iconThere are 5 versions of this paper

Date Written: May 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 (May 2006). CEPR Discussion Paper No. 5657, Available at SSRN: https://ssrn.com/abstract=920927

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mathias Trabandt

Goethe University in Frankfurt ( email )

Germany

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