Where Are We on the Laffer Curve?


Via Bruce Bartlett, Mathias Trabandt and Harald Uhlig try to rigorously run the numbers and see how high taxes need to be before higher rates produce less revenue:

We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring ”constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.

These seem like pretty common sense results. Of course many European countries, including Denmark and Sweden, raise a large share of money through consumption taxes. And it’s not always clear that you want to set a tax at a revenue-maximizing rate. Probably there are some U.S. jurisdictions that could increase revenue by cutting cigarette tax rates, but that would be bad public health policy. The main issue there is that you don’t want to make the taxes so high that they create a large black market.