Elasticty of municipal tax rates in Sweden

Abstract

Few economic concepts have achieved such virality and affected policy more than the “Laffer Curve”. While its simplicity pleases the populace and policymakers alike, scholars have long debated on how to appropriately characterize the curve and how to place a specific tax rate on it. Hence, the purpose of this paper is to study the relationship between municipal tax rates and tax revenues in Sweden. It uses a fixed effect, ordinary least-square regression to characterise the local behaviour of the Laffer curve in the range made up by the entire set of municipal tax rates. The dataset is made up of the municipal and regional tax rates, as well as municipal revenues, for all 290 Swedish municipalities in the period 2000-2023. This enables a regression of almost 7000 data points, a data set size uncommon in this field. The results show a positive tax revenue to tax rate elasticity, indicating that tax revenue can be increased by increasing tax rates. Furthermore, this effect remains positive when controlling for potential time lags in the economic effect. In addition, the supply of labour does not seem to be reduced by an increase in taxes, contrary to assumptions made by previous literature. The conclusion is that either this rigidity of labour supply is the cause of the positive elasticity, or that the assumption of the labour supply as a main driver of the shape of the Laffer curve should be questioned.