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Progressive taxation as an automatic stabilizer under nominal wage rigidity and preference shocks

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  • Miroslav Gabrovski
  • Jang‐Ting Guo

Abstract

Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatility of hours worked and total output in response to a monetary disturbance. We analytically show that this business‐cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule with the symmetric‐equilibrium tax burden unchanged, an increase in the positive level of tax progressivity will always raise the degree of equilibrium nominal‐wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks.

Suggested Citation

  • Miroslav Gabrovski & Jang‐Ting Guo, 2022. "Progressive taxation as an automatic stabilizer under nominal wage rigidity and preference shocks," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 232-246, September.
    • Handle: RePEc:bla:ijethy:v:18:y:2022:i:3:p:232-246
    DOI: 10.1111/ijet.12305
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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