Testing the Validity of the Laffer-Curve Hypothesis

In a simple macromodel of endogenous growth for 13 OECD countries, the effects of deficit financed tax cuts on output and tax revenue are examined and certain widely assumed properties of the Laffer curve are shown to hold for a portion only of the sample countries. The shape of the Laffer curve is shown to be closely associated with both the theoretical underpinnings of the crowding out hypothesis and the literature on the disincentive effects of taxation; i.e., a permanent reduction in average tax rate is strong enough (insufficient) to allow the government debt to be paid off in the long run without the need for subsequent tax increases mainly in highly taxed economies (economies with crowding out performance).