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- Title
Fiscal policy reforms and dynamic Laffer effects.
- Authors
Oudheusden, Peter
- Abstract
This paper looks at the conditions under which a dynamic Laffer effect occurs. Using a basic model, we explain and reconcile selected findings in the literature. We numerically show that a lower tax rate on capital income is the best candidate for obtaining a dynamic Laffer effect-here defined as an improvement in the long-run budget balance of the government. Moreover, ignoring the stock of initial debt and changes in labor supply lead to an overestimation and underestimation of the effect, respectively. Finally, we show that when lower taxes on factor income are financed by higher taxes on consumption, there exists a wide array of combinations for which there is an improvement in both the long-run government budget balance and lifetime welfare. These combinations, however, differ in their implications for labor supply and immediate welfare effects.
- Subjects
FISCAL policy; LAFFER curve; INCOME tax rates &; tables; STOCKS (Finance); CONSUMPTION (Economics); BUDGET
- Publication
International Tax & Public Finance, 2016, Vol 23, Issue 3, p490
- ISSN
0927-5940
- Publication type
Article
- DOI
10.1007/s10797-015-9369-9