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Are Progressive Income Taxes Stabilizing? : A Reply

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  • Chen, Yan
  • Zhang, Yan

Abstract

Dromel and Pintus [Are Progressive Income Taxes Stabilizing?, Journal of Public Economic Theory 10, (2008) 329-349] have shown that labor-income tax progressivity reduces the likelihood of local indeterminacy, sunspots and cycles in a one sector monetary economy with constant returns to scale. In this note, we extend Dromel and Pintus (2008) into a two sector monetary economy with constant returns to scale studied by Bosi et al. (2007) and reassess the stabilizing effect of progressive income taxes. We show that the result in Dromel and Pintus (2008) is robust to this extension, which means that changes of the production structure won't affect the stabilizing effect of progressive income taxes, i.e., tax progressivity (regressivity) reduces (increases) the likelihood of local indeterminacy, sunspots and cycles.

Suggested Citation

  • Chen, Yan & Zhang, Yan, 2008. "Are Progressive Income Taxes Stabilizing? : A Reply," MPRA Paper 11460, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11460
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    References listed on IDEAS

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    1. Jang-Ting Guo & Sharon G. Harrison, 2001. "Tax Policy and Stability in a Model with Sector-Specific Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 75-89, January.
    2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    3. Guo, Jang-Ting & Lansing, Kevin J., 1998. "Indeterminacy and Stabilization Policy," Journal of Economic Theory, Elsevier, vol. 82(2), pages 481-490, October.
    4. Nicolas L. Dromel & Patrick A. Pintus, 2008. "Are Progressive Income Taxes Stabilizing?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 329-349, June.
    5. Christiano, Lawrence J. & G. Harrison, Sharon, 1999. "Chaos, sunspots and automatic stabilizers," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 3-31, August.
    6. Stefano Bosi & Francesco Magris & Alain Venditti, 2007. "Sunspot Fluctuations in Two-sector Economies with Heterogeneous Agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(2), pages 311-331, November.
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    More about this item

    Keywords

    Tax Progressivity; local indeterminacy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • P35 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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