Several countries, e.g. Denmark and Sweden, show a negative self-financing fraction: these countries are on the “slippery side” of the Laffer curve and can actually improve their budgetary situation by cutting capital taxes, according to our calculations.
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In addition, our results indicate that tax cuts in the EU-14 area are self-financing to a much higher degree compared to the US. We find that for the US model 32% of a labor tax cut and 51% of a capital tax cut are self-financing in the steady state. In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing.
We therefore conclude that there rarely is a free lunch due to tax cuts. However, a substantial fraction of the lunch will be paid for by the efficiency gains in the economy due to tax cuts.
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