How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves?

Hans Holter, Dirk Krueger and Serhiy Stepanchuk ()
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Serhiy Stepanchuk: Cole Polytechnique Federale de Lausanne

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: The recent public debt crisis in most developed economies implies an urgent need for increasing tax revenues or cutting government spending. In this paper we study the importance of household heterogeneity and the progressivity of the labor income tax schedule for the ability of the government to generate tax revenues. We develop an overlapping generations model with uninsurable idiosyncratic risk, endogenous human capital accumulation as well as labor supply decisions along the intensive and extensive margins. We calibrate the model to macro, micro and tax data from the US as well as a number of European countries, and then for each country characterize the labor income tax Laffer curve under the current country-specific choice of the progressivity of the labor income tax code. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the laffer curve by 7%. We also find that modeling household heterogeneity is important for the shape of the Laffer curve.

Keywords: Progressive Taxation; Fiscal Policy; Laffer Curve; Government Debt (search for similar items in EconPapers)
JEL-codes: E62 H20 H60 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-03-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Related works:
Journal Article: How do tax progressivity and household heterogeneity affect Laffer curves? (2019)
Working Paper: How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? (2014)
Working Paper: How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? (2014)
Working Paper: How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? (2014)
Working Paper: How does tax progressivity and household heterogeneity affect Laffer curves? (2014)
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