Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2000:5: On the Analytics of the Dynamic Laffer Curve

Jonas Agell () and Mats Persson ()
Additional contact information
Jonas Agell: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Mats Persson: Institute for International Economic Studies, Postal: Stockholm University, SE-106 91 Stockholm, Sweden

Abstract: In this paper, we analyze government budget balance within a simple model of endogenous growth. For the AK model, simple analytical conditions for a tax cut to be self-financing can be derived. The critical variable is not the tax rate per se, but the "transfer-adjusted tax rate". We discuss some conceptual issues in dynamic revenue analysis, and we explain why previous studies have arrived at seemingly contradictory results. Finally, we perform an empirical study of the transfer-adjusted tax rates of the OECD countries to see which country has the highest potential for fiscal improvements; it turns out that only a few countries have any potential for such "dynamic scoring".

Keywords: Laffer effects; intertemporal models; dynamic scoring; growth models

JEL-codes: E62; O41

25 pages, May 2, 2000

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