Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending
AbstractWe examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical Ã¡uctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.
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Bibliographic InfoPaper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201302.
Date of creation: Apr 2013
Date of revision: Apr 2013
Progressive Income Taxation; Equilibrium (In)determinacy; Utility-Generating.;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-27 (All new papers)
- NEP-DGE-2013-04-27 (Dynamic General Equilibrium)
- NEP-MAC-2013-04-27 (Macroeconomics)
- NEP-PBE-2013-04-27 (Public Economics)
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