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Are Progressive Income Taxes Stabilizing?

  • NICOLAS L. DROMEL
  • PATRICK A. PINTUS

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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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 10 (2008)
Issue (Month): 3 (06)
Pages: 329-349

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Handle: RePEc:bla:jpbect:v:10:y:2008:i:3:p:329-349
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