Effective marginal tax rates on labor income for the "representative" Swede have increased from roughly 50 percent in 1959 to 80 percent today. The effects of this increase in the level of taxation are examined using a two-sector model parameterized to correspond to the Swedish economy. The model contains a single household which allocates labor to either taxed (essentially market) or untaxed (largely household) uses. The estimated long-run effects are sufficient to explain up to 75 percent of the recent decline in the measured growth rate of the Swedish GNP. Calculations of total tax revenues are also derived from the model. These peak when the tax rate is approximately 70 percent, indicating that Sweden is presently on the downward-sloping portion of its "Laffer Curve."

[Effective marginal tax rates on labor income for the "representative" Swede have increased from roughly 50 percent in 1959 to 80 percent today. The effects of this increase in the level of taxation are examined using a two-sector model parameterized to correspond to the Swedish economy. The model contains a single household which allocates labor to either taxed (essentially market) or untaxed (largely household) uses. The estimated long-run effects are sufficient to explain up to 75 percent of the recent decline in the measured growth rate of the Swedish GNP. Calculations of total tax revenues are also derived from the model. These peak when the tax rate is approximately 70 percent, indicating that Sweden is presently on the downward-sloping portion of its "Laffer Curve."]

We develop a method for measuring the foresight agents have. We first dichotomize an agent’s information at current date t into knowledge up to date t 1 f and expectations after t 1 f. We then form a residual-based test statistic that allows us to compare prediction errors for econometric models based on different values of f. We illustrate the method, examining investment around tax reforms to measure the foresight firms have about tax policy. In this illustration, current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes.