Fiscal Policy Reforms and Dynamic Laffer Effects

P. van Oudheusden

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Abstract

We examine the impact of fiscal policy reforms on the long-run government budget balance in a one-sector model of endogenous growth with factor income taxes, a tax on consumption, non-productive public goods expenditures, and a labour-leisure trade-off. In addition, we allow for different structures of government expenditures and public debt. We analytically show that, when performing a dynamic Laffer effect analysis, there exists a set of conditions that hold for a number of endogenous growth models. We find that for the euro area an improvement in the long-run government budget balance is always obtained for a lower tax rate on capital income but is only obtained for a substantial lower tax rate on labour income. Moreover, 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 labour supply and immediate welfare effects.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages27
Volume2010-15
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-15

Keywords

  • Dynamic Scoring
  • Laffer Effect
  • Factor Income Taxation
  • Endogenous Growth

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