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Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences

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  • Aleksandar Vasilev

Abstract

We show that in a exogenous growth model with Epstein-Zin (1989, 1991) recursive preferences calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. In contrast, under the flat tax regime (2008-16), the same economy calibrated to Bulgarian data now displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the †sink†dynamics.

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  • Aleksandar Vasilev, 2021. "Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 64(1), pages 51-68.
  • Handle: RePEc:eei:journl:v:64:y:2021:i:1:p:51-68
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    More about this item

    Keywords

    Progressive taxation; Epstein-Zin preferences; Equilibrium (In)determinacy; Bulgaria;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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