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Progressive taxation and macroeconomic stability in two-sector models with social constant returns

Author

Listed:
  • Been-Lon Chen

    (Institute of Economics, Academia Sinica)

  • Mei Hsu

    (National Taiwan Normal University)

  • Yu-Shan Hsu

    (National Chung Cheng University)

Abstract

It has been shown that, in the two-sector Benhabib–Farmer–Guo model with technologies of social increasing returns that exhibits indeterminacy, progressive income taxes de-stabilize the economy. This paper revisits the robustness of the tax implication in the two-sector Benhabib–Nishimura model with technologies of social constant returns that exhibits indeterminacy. We show that a progressive income tax stabilizes the economy against sunspot fluctuations, and thus the tax implication based on the two-sector Benhabib–Farmer–Guo model is not robust.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jeczfn:v:125:y:2018:i:1:d:10.1007_s00712-018-0596-2
    DOI: 10.1007/s00712-018-0596-2
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Two-sector model; Progressive income taxes; Indeterminacy; No-income-effect utility; Social constant returns;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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