NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Far Are We From The Slippery Slope? The Laffer Curve Revisited

Mathias Trabandt, Harald Uhlig

NBER Working Paper No. 15343
Issued in September 2009, Revised in December 2011
NBER Program(s):Economic Fluctuations and Growth, Public Economics

We compare Laffer curves for labor and capital taxation for the US, the EU-14 and individual European countries, using a neoclassical growth model featuring "constant Frisch elasticity" (CFE) preferences. We provide new tax rate data. The US can increase tax revenues by 30% by raising labor taxes and by 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Dynamic scoring for the EU-14 shows that 54% of a labor tax cut and 79% of a capital tax cut are self-financing. The Laffer curve in consumption taxes does not have a peak. Endogenous growth and human capital accumulation locates the US and EU-14 close to the peak of the labor tax Laffer curve. We derive conditions under which household heterogeneity does not matter much for the results. By contrast, transition effects matter: a permanent surprise increase in capital taxes always raises tax revenues.

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Document Object Identifier (DOI): 10.3386/w15343

Published: "The Laffer Curve Revisited," with Mathias Trabandt, Journal of Monetary Economics, Volume 58, Issue 4, May 2011, pp. 305-327.

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