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Progressive Income Taxation and Economic Cycles: a Multiplier-Accelerator Model

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  • Luciano Fanti
  • Piero Manfredi

Abstract

The paper investigates the role of progressive income taxation in the frame of the basic multiplier-accelerator model in continuous time. It is shown that, while the proportional taxation is, as common wisdom believes, always stabilizing, in the case of non-linear progressive taxation, an increase of the degree of progression is always destabilizing. Moreover it is shown that in the presence of tax collection lags, the progressive taxation can have a twofold role, either stabilizing or destabilizing. Our results have a theoretical as well as a practical aspect. Firstly, they shed new light on the dynamic role of various economic behaviours such as the thriftiness of the agents, public expenditure, the maximal income tax rate and finally the degree of progression of income taxation. Secondly they show a further, so far neglected, factor causing economic fluctuations, through the complex effect of a progressive as well as lagged income tax. Thirdly, they provide the policy maker with clear stabilization rules and the warning of possible complicated dynamic configurations (such as the "corridor" stability case).

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Bibliographic Info

Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2003/11.

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Date of creation: 01 Jan 2003
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Handle: RePEc:pie:dsedps:2003/11

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Related research

Keywords: Progressive Taxation; Cycles;

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Cited by:
  1. Luciano Fanti & Luca Gori, 2009. "Endogenous lifetime in an overlapping generations small open economy," Discussion Papers 2009/92, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  2. Manuela Gussoni - Andrea Mangani, 2009. "The impact of public funding for innovation on firms' R&D investments: Do R&D cooperation and appropriability matter?," Discussion Papers 2009/90, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  3. Lorenzo Corsini & Elisabetta Olivieri, 2008. "Technological Change and the Wage Differential between Skilled and Unskilled Workers: Evidence from Italy," Discussion Papers 2008/73, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  4. Luciano Fanti & Luca Gori, 2012. "PAYG Pensions and Economic Cycles Exogenous versus Endogenous Fertility," Public Finance Review, , vol. 40(2), pages 240-269, March.
  5. Luciano Fanti & Luca Gori, 2009. "Endogenous fertility, endogenous lifetime and economic growth: the role of health and child policies," Discussion Papers 2009/91, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  6. Christos Karpetis & Erotokritos Varelas, 2012. "Fiscal and Monetary Policy Interaction in a Simple Accelerator Model," International Advances in Economic Research, Springer, vol. 18(2), pages 199-214, May.

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