Simple Analytics of the Dynamic Laffer Curve Under Alternative Financing Schemes

Abstract

In this study, we investigate self-financing tax cuts, which are also known as dynamic Laffer effects. By proposing alternative definitions for dynamic Laffer effects, a policy option that features a tax cut should be chosen primarily on the basis of the relative magnitude of government transfers. The simple analytical condition under an alternative financing scheme that leaves current deficits unchanged reduces to a simple comparison between tax revenues and government transfers. Empirical examination of those conditions indicates that whereas countries in Northern and Western Europe, Australia, Canada, New Zealand, Korea, and Mexico show the most potential for experiencing dynamic Laffer effects, countries in Eastern Europe, France, the Netherlands and Portugal were not very susceptible.