Essays on dynamic Laffer curves
MetadataShow full item record
This dissertation consists of three chapters. The first chapter investigates self-financing tax cuts, which are also known as dynamic Laffer effects, from an open-economy perspective. By proposing alternative definitions for dynamic Laffer effects, it is possible to (a) establish that the elasticity of intertemporal substitution is less than unity for dynamic Laffer effects to occur and (b) relate dynamic Laffer effects to discussions on fiscal adjustments and consolidations. The results of our analyses provide a method for examining these 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. The analytical results also suggest that aggressive tax hikes and failures to reduce government transfers in fiscal consolidations can deteriorate the long-run fiscal stability. Through empirical investigation of our propositions, we came to four key conclusions. First, the countries with the most potential for experiencing the dynamic Laffer effect are the welfare states in Northern and Western Europe, Australia, Canada, New Zealand, Korea, and Mexico. Second, the countries with least potential to experience dynamic Laffer effects are France, the Netherlands, Portugal, and a number of countries in Eastern Europe. Third, in the face of economic turmoil, Ireland, Spain, and Germany lost the potential to experience dynamic Laffer effects. Finally, it is difficult to ascertain the potential for four countries to experience dynamic Laffer effects, given unique economic situations: Italy, Greece, the United States, and the United Kingdom. The second chapter extends the Ireland (1994) model to incorporate population growth and examines a dynamic effect of a tax reduction on a long-run government budget. We find evidence suggesting that the dynamic effect of a tax cut improves the government budget situation in the long-run. Our numerical analysis suggests that a population growth rate consistent with the U.S. economy has positive effects on a long-run government budget. It is likely that low population growth leads to the deterioration of a long-run government budget. However, dynamic Laffer curves fail to arise incorporating a moderate initial debt level into the model. It implies that it is less likely for the dynamic Laffer curves to arise in most advanced countries. Furthermore, a public debt overhangs experiment casts doubt on the dynamic Laffer curves. The third chapter examines the accuracy of federal budget and macroeconomic forecasts by the Congressional Budget Office (CBO) under a flexible loss function. Previous research assumed that the forecast loss function is quadratic and symmetric, and the literature has found evidence of under-prediction in Office of Management and Budget outlay forecast and over-prediction in states revenue forecasts. I find evidence that the CBO over-predicts revenues and under-predicts outlays, therefore under-predicts the budget deficit. These results might attribute to asymmetry of the loss function of the macroeconomic forecasts.