The Horizontally s-shaped laffer curve

Fève, Patrick, Matheron, Julien and Sahuc, Jean-Guillaume (2017) The Horizontally s-shaped laffer curve. Journal of the European Economic Association. (In Press)

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Official URL: http://tse-fr.eu/pub/31629

Abstract

In a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents, the properties of the Laffer curve depend on whether debt or transfers are adjusted to balance the government budget constraint. The Laffer curve conditional on public debt is horizontally S-shaped. Two opposing forces explain this result. First, when government wealth increases, the fiscal burden declines, calling for lower tax rates. Second, because the interest rate decreases when government wealth increases, fiscal revenues may also decline, calling for higher taxes. For sufficiently negative government debt, the second force dominates, leading to the odd shape of the Laffer curve conditional on debt.

Item Type: Article
Language: English
Date: 2017
Refereed: Yes
Uncontrolled Keywords: Laffer Curve, Incomplete Markets, Labor Supply, Public Debt
JEL codes: E00 - General
E60 - General
Subjects: B- ECONOMIE ET FINANCE
Divisions: Toulouse School of Economics - TSE
Site: UT1
Date Deposited: 20 Apr 2017 08:27
Last Modified: 18 Oct 2017 15:11
OAI ID: oai:tse-fr.eu:31629
URI: http://publications.ut-capitole.fr/id/eprint/23740

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