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Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

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Author Info
Erkki Koskela
Mikko Puhakka
Abstract

We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 62 (2006)
Issue (Month): 2 (June)
Pages: 149-167
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200606)62:2_149:iasoec_2.0.tx_2-o

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Related research
Keywords: overlapping generations endogenous cycles proportional and progressive taxes indeterminacy

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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