Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 95: Sweden’s Laffer Curve: Taxation and the Unobserved Economy

Edgar L. Feige and Robert T. McGee
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Edgar L. Feige: University of Wisconsin-Madison
Robert T. McGee: University of Wisconsin-Madison

Abstract: Recent research on the unobserved economy suggests that the phenomenon has important implications for both macroeconomic policy and public finance. This paper focuses attention on the public finance implications by developing a simple macro-model from which it is possible to derive a Laffer curve. The model reveals that the shape and position of the Laffer curve depend upon the strength of supply side effects, the progressivity of the tax system and the size of the unobserved economy. Using alternative parameterizations of each of these effects, it is possible to obtain rough empirical estimates of the Laffer curve for Sweden.

Keywords: Taxation; Public finance; Laffer curve

JEL-codes: E60; H20

34 pages, June 1983

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