<abstract xmlns="http://www.w3.org/1999/xhtml"><p>In the earlier related literature, consumption tax rate Laffer curve is found to be strictly increasing (see <xref ref-type="bibr" rid="j_ntaxj-2017-0004_ref_024_w2aab3b7c29b1b6b1ab2ac24Aa">Trabandt and Uhlig (2011)</xref>). In this paper, a general equilibrium macro model is augmented by introducing a substitute for private consumption in the form of home production. The introduction of home production brings about an additional margin of adjustment – an increase in consumption tax rate not only decreases labor supply and reduces the consumption tax base but also allows a substitution of market goods with home-produced goods. The main objective of this paper is to show that, after the introduction of home production, the consumption tax Laffer curve exhibits an inverse U-shape. Also the income tax Laffer curves are significantly altered. The result shown in this paper casts doubt on some of the earlier results in the literature.</p></abstract>

In the earlier related literature, consumption tax rate Laffer curve is found to be strictly increasing (see Trabandt and Uhlig (2011)). In this paper, a general equilibrium macro model is augmented by introducing a substitute for private consumption in the form of home production. The introduction of home production brings about an additional margin of adjustment – an increase in consumption tax rate not only decreases labor supply and reduces the consumption tax base but also allows a substitution of market goods with home-produced goods. The main objective of this paper is to show that, after the introduction of home production, the consumption tax Laffer curve exhibits an inverse U-shape. Also the income tax Laffer curves are significantly altered. The result shown in this paper casts doubt on some of the earlier results in the literature.

Laffer Curves and Home Production

Nordic Tax Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Laffer Curves and Home Production"}

In the earlier related literature, consumption tax rate Laffer curve is found to be strictly increasing (see Trabandt and Uhlig (2011)). In this paper, a...

Parameter	Value
γ^A	0.009
ϕ	0.82
α	0.349
α^h	1
δ	0.060
σ	2
γ	2.420
ω	0.545
β	0.969
κ	0.5

Variable	Model-produced value	Data value
c/y	0.536	0.539
i/y	0.181	0.182
r^b	0.051	0.015 Average yield on 5-year government bond 2009–2014.

Parameter	Baseline	Modified	Laffer Peak
	value	value	τⁿ	τ^c	τ^k
Baseline			35%	60%	0%
Behavioral parameters

σ	2	0.5	+4%	+11%	0%
β	0.969	0.95	0%	–5%	0%
ϕ	0.82	0.1	+5%	+12%	+2%
κ	0.5	0.4	+1%	+33%	0%
Firm level parameters

g^A	0.009	0.02	–2%	–8%	0%
δ	0.06	0.09	0%	–8%	0%
The government

g/y	0.243	0.3	0%	–9%	0%
b/y	0.493	0.8	0%	0%	0%

Variable	Value
g/y	0.243
ig/y	0.04
T^c	0.239
Tⁿ	0.448
T^k	0.307
b/y	0.509

Laffer Curves and Home Production

Article Category: Article

Published Online: Jun 23, 2017

Page range: 59 - 69

Received: Dec 17, 2016

Accepted: Mar 03, 2017

DOI: https://doi.org/10.1515/ntaxj-2017-0004

Keywords
Taxation, Laffer curve, Consumption, Home-production

© 2017 M. Kotamäki

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Calibration of Parameters

Steady State and Data Averages 2009–2013

Sensitivity of the Model with Home Production

Calibration of Exogenous Variables

Laffer Curves and Home Production

Article Category: Article

Published Online: Jun 23, 2017

Page range: 59 - 69

Received: Dec 17, 2016

Accepted: Mar 03, 2017

DOI: https://doi.org/10.1515/ntaxj-2017-0004

KeywordsTaxation, Laffer curve, Consumption, Home-production

© 2017 M. Kotamäki

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Calibration of Parameters

Steady State and Data Averages 2009–2013

Sensitivity of the Model with Home Production

Calibration of Exogenous Variables

Keywords
Taxation, Laffer curve, Consumption, Home-production