Identifying laffer bounds : a sufficient-statistics approach with an application to Germany
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Scandinavian journal of economics, 2016, Vol. 118, No. 4, pp. 646-665
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LORENZ, Normann, SACHS, Dominik, Identifying laffer bounds : a sufficient-statistics approach with an application to Germany, Scandinavian journal of economics, 2016, Vol. 118, No. 4, pp. 646-665 - https://hdl.handle.net/1814/44767
Abstract
We derive a simple sufficient-statistics test for whether a nonlinear tax-transfer system is second-best Pareto efficient. If it is not, then it is beyond the top of the Laffer curve and there exists a tax cut that is self-financing. The test depends on the income distribution, extensive and intensive labor supply elasticities, and income effect parameters. A tax-transfer system is likely to be inefficient if marginal tax rates are quickly falling in income. We apply this test to the German tax-transfer system, and we find that the structure of effective marginal tax rates is likely to be inefficient in the region where transfers are phased out.
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Version of Record online: 15 NOV 2016