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Lorenz, Normann; Sachs, Dominik (October 2016): Identifying Laffer Bounds. A Sufficient-Statistics Approach with an Application to Germany. In: Scandinavian Journal of Economics, Vol. 118, No. 4: pp. 646-665
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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.