Working Paper

The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve


Abstract: We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models. One of the elasticities that enters our formula has been estimated in the elasticity of taxable income literature. We apply standard empirical methods from this literature to data produced by reforming the tax system in a model economy. We find that these standard methods underestimate the relevant elasticity in models with endogenous human capital accumulation.

Keywords: Sufficient Statistic; Laffer Curve; Marginal Tax Rate; Elasticity;

JEL Classification: D91; E21; H2; J24;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2015-11-10

Number: 2015-38