Abstract
AbstractWe estimate Laffer Curves for direct and indirect taxes for each Eurozone country, using panel data from 1995 to 2011, by means of Seemingly Unrelated Regression (SUR) models. We choose the three taxes that contribute the most to the government tax revenue: the value added tax (VAT), the corporate income tax (CT), and the labour income tax (LT). From our estimated significant parameters, which have the expected signs according to the Laffer Curve theory, we obtained a maximum/optimal tax rate for VAT for Greece, Portugal, and Slovakia and for the majority of the Eurozone countries for direct taxes. We also take into consideration the business cycle. Many countries do not present differences in regime, and when they do, the optimal tax rate is higher during recessions. Finally, we compare the observed tax rates in 2012 to the estimated optimal tax rates, to assess if the 2012 policy was located at the prohibitive range of the Laffer Curve. Our results are important for the discussions about fiscal discipline and harmonization in the Eurozone, since they exhibit important disparities between countries and taxes. We can see that, especially for CT and LT, there is a strong divide between the values of the optimal maximum tax rates for Eastern European countries and Western European economies. Additionally, the economic and financial conditions of each country also influence the value for the tax rate.
Highlights
A few years ago the European Union member countries, in particular the European and Monetary Union (EMU) countries, have come into a major economic and ...nancial crisis that started in 2008
From our estimated signi...cant parameters, which have the expected signs according to the La¤er Curve theory, we obtained a maximum/optimal tax rate for value added tax (VAT) for Greece, Portugal, and Slovakia and for the majority of the Eurozone countries for direct taxes
By ranking the optimal taxes across the countries, one sees that in general the smaller occur amongst Eastern European countries, like Estonia, Latvia, and Slovenia, while the larger are in Western European economies, such as Italy, the Netherlands, and France
Summary
A few years ago the European Union member countries, in particular the European and Monetary Union (EMU) countries, have come into a major economic and ...nancial crisis that started in 2008. Serious doubts have been raised about the e¢ ciency of these austerity measures to cut public budget de...cits Most of these doubts and the discussion around them were raised based on a concept called the La¤er Curve, which expresses a relationship between tax rates and revenues. This concept was ...rst introduced by Wanniski (1978), when the author de...ned it as: “there are always two tax rates that yield the same revenue”. Using this de...nition we can infer that the relationship between tax rates and tax revenues is an inverted U-shaped curve, in which there is a unique maximum level to the tax rate and a maximum level of revenues. He gave the name to this Curve honoring the economist Arthur La¤er, the ...rst to talk about this relationship/tradeo¤
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