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Are Progressive Income Taxes Stabilizing?

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Author Info

  • NICOLAS L. DROMEL
  • PATRICK A. PINTUS

Abstract

We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle-point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after-tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation-driven business fluctuations. Copyright � 2008 Blackwell Publishing, Inc..

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 10 (2008)
Issue (Month): 3 (06)
Pages: 329-349

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Handle: RePEc:bla:jpbect:v:10:y:2008:i:3:p:329-349

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Cited by:
  1. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2013. "Sectoral Composition of Government Spending and Macroeconomic (In)stability," IEAS Working Paper : academic research 13-A010, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  2. Estrada, Fernando, 2011. "The power to tax," MPRA Paper 33203, University Library of Munich, Germany.
  3. Seiya Fujisaki & Kazuo Mino, 2008. "Income Taxation, Interest-Rate Control and Macroeconomic Stability with Balanced-Budget," Discussion Papers in Economics and Business 08-20, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  4. Ismael, Mohanad, 2011. "Progressive income taxes and macroeconomic instability," MPRA Paper 49917, University Library of Munich, Germany.
  5. Chen, Yan & Zhang, Yan, 2008. "Are Progressive Income Taxes Stabilizing? : A Reply," MPRA Paper 11460, University Library of Munich, Germany.
  6. Bassanini, Andrea, 2012. "Aggregate Earnings and Macroeconomic Shocks: The Role of Labour Market Policies and Institutions," IZA Discussion Papers 6918, Institute for the Study of Labor (IZA).
  7. Stefano Bosi & Thomas Seegmuller, 2008. "On the Role of Progressive Taxation in a Ramsey Model with Heterogeneous Households," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00331299, HAL.
  8. Estrada, Fernando, 2010. "Política tributaria y economía fiscal La posición Hayek (1959, 1979) con comentarios de Brenann/Buchanan (1980)
    [Fiscal tax policy and economy]
    ," MPRA Paper 20094, University Library of Munich, Germany.
  9. Fernando Estrada, 2011. "The Power to Tax: A Lecture of Hayek," Economic Research Guardian, Weissberg Publishing, vol. 1(1), pages 2-14, September.
  10. Stefano Bosi & Thomas Seegmuller, 2008. "On the Role of Progressive Taxation in a Ramsey Model with Heterogeneous Households," Post-Print halshs-00331299, HAL.
  11. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
  12. Fernando, Estrada, 2010. "A reading Hayek on power to tax," MPRA Paper 21526, University Library of Munich, Germany.
  13. Estrada, Fernando, 2010. "The progressive tax," MPRA Paper 34971, University Library of Munich, Germany, revised Nov 2011.

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