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Progressive income taxes and macroeconomic instability

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  • Mohanad Ismael

    ()
    (EPEE, University of Evry Val d'Essonne)

Abstract

This paper aims to study the stability properties of a two-period over- lapping generations model (OLG) with a progressive labor-income taxa- tion rule. In this case, wage income tax rates are increasing with agent's income. Each representative agent lives two periods: youth and adult- hood. In the first period, agents choose labor supply and allocate their after-tax income between consumptions and savings (capital accumula- tions). In the second period, agents are retired and consume entirely their savings returns. It is shown that progressive labor-income taxation policy acts as a destabilizing factor in the sense that a higher progressivity makes the emergence of indeterminacy and endogenous fluctuations more likely. These fluctuations appear if the elasticity of capital-labor substi- tution is sufficiently low. Moreover, we show that saving rate widens the range of parameters giving rise to endogenous fluctuations. The analytical findings are completed by a numerical example.

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Bibliographic Info

Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 10-13.

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Length: 16 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:eve:wpaper:10-13

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Keywords: Progressive income taxes; Indeterminacy; Overlapping generations; Endogenous labor supply;

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