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Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability

Author

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  • Jang-Ting Guo

    (Department of Economics, University of California Riverside)

  • Shu-Hua Chen

    (National Taipei University)

Abstract

In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self-fulfilling expectations or sunspots.

Suggested Citation

  • Jang-Ting Guo & Shu-Hua Chen, 2015. "Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability," Working Papers 201509, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:201509
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    References listed on IDEAS

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    8. Shu-Hua Chen & Jang-Ting Guo, 2019. "Progressive taxation as an automatic destabilizer under endogenous growth," Journal of Economics, Springer, vol. 127(1), pages 47-71, June.
    9. Steven Yamarik, 2001. "Nonlinear Tax Structures and Endogenous Growth," Manchester School, University of Manchester, vol. 69(1), pages 16-30, January.
    10. ShuHua Chen & JangTing Guo, 2013. "On indeterminacy and growth under progressive taxation and productive government spending," Canadian Journal of Economics, Canadian Economics Association, vol. 46(3), pages 865-880, August.
    11. Shu‐Hua Chen & Jang‐Ting Guo, 2013. "On indeterminacy and growth under progressive taxation and productive government spending," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(3), pages 865-880, August.
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    Cited by:

    1. Been-Lon Chen & Mei Hsu & Yu-Shan Hsu, 2018. "Progressive taxation and macroeconomic stability in two-sector models with social constant returns," Journal of Economics, Springer, vol. 125(1), pages 51-68, September.
    2. Been-Lon Chen & Yunfang Hu & Kazuo Mino, 2016. "Stabilization Effects of Taxation Rules in Small-Open Economies with Endogenous Growth," KIER Working Papers 946, Kyoto University, Institute of Economic Research.
    3. Juin‐Jen Chang & Jang‐Ting Guo & Jhy‐Yuan Shieh & Wei‐Neng Wang, 2019. "Sectoral composition of government spending, distortionary income taxation, and macroeconomic (in)stability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(1), pages 95-107, March.
    4. Aleksandar Vasilev, 2016. "Progressive taxation and (in)stability in an endogenous growth model with human capital accumulation," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 59(2), pages 1-15.
    5. Shu‐Hua Chen & Jang‐Ting Guo, 2018. "On Indeterminacy and Growth under Progressive Taxation and Utility‐Generating Government Spending," Pacific Economic Review, Wiley Blackwell, vol. 23(3), pages 533-543, August.
    6. Chen, Shu-Hua, 2019. "On economic growth and automatic stabilizers under linearly progressive income taxation," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 378-395.
    7. Chen, Been-Lon & Hu, Yunfang & Mino, Kazuo, 2020. "Income Taxation Rules and Stability of a Small Open Economy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    8. Aman A. Bara and Bidisha Chakraborty, 2019. "Is Public-private Partnership an Optimal Mode of Provision of Infrastructure?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 44(1), pages 97-123, March.
    9. Shu-Hua Chen & Jang-Ting Guo, 2019. "Progressive taxation as an automatic destabilizer under endogenous growth," Journal of Economics, Springer, vol. 127(1), pages 47-71, June.
    10. Wei-Bin ZHANG, 2018. "Corruption, governments’ debts, trade, and global growth," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(615), S), pages 27-50, Summer.
    11. Been-Lon Chen & Yunfang Hu & Kazuo Mino, 2018. "Does Nonlinear Taxation Stabilize Small Open Economies?," KIER Working Papers 997, Kyoto University, Institute of Economic Research.
    12. Fujisaki, Seiya, 2017. "Equilibrium Determinacy in a Two-Tax System with Utility from Government Expenditure," MPRA Paper 81214, University Library of Munich, Germany.
    13. Chen, Been-Lon & Hu, Yunfang & Mino, Kazuo, 2019. "Stability of a Small Open Economy under Nonlinear Income Taxation," MPRA Paper 98101, University Library of Munich, Germany.
    14. Vasilev, Aleksandar, 2016. "Progressive taxation and (in)stability in an endogenous growth model with human capital accumulation: the case of Bulgaria," EconStor Preprints 144212, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Progressive Income Taxation; Endogenous Growth; Equilibrium (In)determinacy.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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