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On the Role of Progressive Taxation in a Ramsey Model with Heterogeneous Households

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Author Info
Stefano Bosi () (EQUIPPE - Université de Lille I, EPEE - Université d'Evry-Val d'Essonne)
Thomas Seegmuller () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
Abstract

The aim of this paper is to study the role of progressive tax rules on the allocations of steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply in elastic, considering different tax rates on capital and labor incomes is relevant. The steady state analysis allows us to highlight the existence of different types of stationary equilibria. While patient agents always hold capital, impatient ones have or not positive savings, depending on the leval of real interest rate. Furthermore, it is not always optimal for all households to have a positive labor supply. Studying the comparative statics and local dynamics, we focus on the steady state with a segmented population : patient households own the whole stock of capital, while the impatient ones are workers. Varying the population sizes and the tax rates, we underline the crucial role of fiscal progressivity and endogenous labor. Moreover, in contrast to many contributions, we prove that progressive tax rules can promote expectation-driven fluctuations and endogenous cycles which means that progressivity can be inopportune to stabilize macroeconomic volatility.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00331299_v1.

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Date of creation: Jun 2008
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Handle: RePEc:hal:cesptp:halshs-00331299_v1

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Keywords: Progressive taxation; heterogeneous agents; borrowing constraint; endogenous labor supply; steady state allocation; macroeconomic stability.;

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