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Are Progressive Income Taxes Stabilizing?

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  • NICOLAS L. DROMEL
  • PATRICK A. PINTUS

Abstract

We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle-point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after-tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation-driven business fluctuations. Copyright © 2008 Blackwell Publishing, Inc..

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  • 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.
  • Handle: RePEc:bla:jpbect:v:10:y:2008:i:3:p:329-349
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    Cited by:

    1. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2015. "Sectoral Composition Of Government Spending And Macroeconomic (In)Stability," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 23-33, January.
    2. Xue, Jianpo & Yip, Chong K., 2014. "Factor substitution and taxation in a finance constrained economy," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 101-112.
    3. Lloyd-Braga, Teresa & Modesto, Leonor & Seegmuller, Thomas, 2014. "Market distortions and local indeterminacy: A general approach," Journal of Economic Theory, Elsevier, pages 216-247.
    4. Mohanad Ismael, 2010. "Progressive income taxes and macroeconomic instability," Documents de recherche 10-13, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    5. Drine, Imed & Nabi, M. Sami, 2010. "Public external debt, informality and production efficiency in developing countries," Economic Modelling, Elsevier, pages 487-495.
    6. Bosi, Stefano & Seegmuller, Thomas, 2010. "On the role of progressive taxation in a Ramsey model with heterogeneous households," Journal of Mathematical Economics, Elsevier, pages 977-996.
    7. Alisdair McKay & Ricardo Reis, 2013. "The role of automatic stabilizers in the U.S. business cycle," Boston University - Department of Economics - Working Papers Series 2013-007, Boston University - Department of Economics.
    8. Estrada, Fernando, 2010. "The progressive tax," MPRA Paper 34971, University Library of Munich, Germany, revised Nov 2011.
    9. Fernando Estrada, 2011. "The Power to Tax: A Lecture of Hayek," Economic Research Guardian, Weissberg Publishing, vol. 1(1), pages 2-14, September.
    10. Andrea Bassanini, 2012. "Aggregate Earnings and Macroeconomic Shocks: the Role of Labour Market Policies and Institutions," Review of Economics and Institutions, Università di Perugia.
    11. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
    12. Estrada, Fernando & González, Jorge Iván, 2014. "Tax Power and Economics," MPRA Paper 59075, University Library of Munich, Germany.
    13. Chen, Yan & Zhang, Yan, 2008. "Are Progressive Income Taxes Stabilizing? : A Reply," MPRA Paper 11460, University Library of Munich, Germany.
    14. repec:hal:journl:halshs-00331299 is not listed on IDEAS
    15. Estrada, Fernando, 2011. "The power to tax," MPRA Paper 33203, University Library of Munich, Germany.
    16. Estrada, Fernando, 2010. "Política tributaria y economía fiscal La posición Hayek (1959, 1979) con comentarios de Brenann/Buchanan (1980)
      [Fiscal tax policy and economy]
      ," MPRA Paper 20094, University Library of Munich, Germany.
    17. Estrada, Fernando & González, Jorge Iván, 2014. "Política tributaria y economía fiscal en los enfoques de Hayek y Brenann/Buchanan
      [Tax policy and fiscal economy approaches Hayek and Brennan / Buchanan]
      ," MPRA Paper 57123, University Library of Munich, Germany.
    18. Seiya Fujisaki & Kazuo Mino, 2008. "Income Taxation, Interest-Rate Control and Macroeconomic Stability with Balanced-Budget," Discussion Papers in Economics and Business 08-20, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    19. Huang, Kevin X.D. & Meng, Qinglai & Xue, Jianpo, 2017. "Balanced-budget income taxes and aggregate stability in a small open economy," Journal of International Economics, Elsevier, pages 90-101.
    20. Gokan, Yoichi, 2013. "Indeterminacy, labor and capital income taxes, and non-linear tax schedules," Journal of Macroeconomics, Elsevier, pages 138-149.
    21. Fernando, Estrada, 2010. "A reading Hayek on power to tax," MPRA Paper 21526, University Library of Munich, Germany.
    22. Kevin x.d. Huang & Qinglai Meng & Jianpo Xue, 2017. "Balanced-budget rules and aggregate instability: The role of endogenous capital utilization," Vanderbilt University Department of Economics Working Papers 17-00005, Vanderbilt University Department of Economics.
    23. Daniel R. Carroll & Eric R. Young, 2009. "A note on sunspots with heterogeneous agents," Working Paper 0906, Federal Reserve Bank of Cleveland.
    24. repec:mje:mjejnl:v:10:y:2014:i:2:p:49-61 is not listed on IDEAS

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