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Progressive Tax Policy and Economic Stability

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  • Christian Weller
  • Manita Rao

Abstract

Economic instability has risen in emerging economies after capital account liberalization. A more progressive income tax policy could offer a stabilizing alternative. It could result in more revenue, more countercyclical policy, and more income equality and thus more stable demand growth. We test the effects of progressive taxes on stability using univariate and multivariate analyses based on panel data for emerging economies from 1982 to 2002 and compare those to the effects of a value added tax (VAT). We also consider possible constraints on tax policy design, such as government spending, international tax competition, and openness. Progressive taxes are associated with greater income equality and a higher likelihood of countercyclical fiscal policies. The potential benefits from progressive income taxation, though, are lower with VAT. Tax policy is also constrained by government expenditures and openness, but not by lower corporate taxes, suggesting that all income tax rates are constrained by openness.

Suggested Citation

  • Christian Weller & Manita Rao, 2010. "Progressive Tax Policy and Economic Stability," Journal of Economic Issues, Taylor & Francis Journals, vol. 44(3), pages 629-659.
  • Handle: RePEc:mes:jeciss:v:44:y:2010:i:3:p:629-659 DOI: 10.2753/JEI0021-3624440304
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    References listed on IDEAS

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    Cited by:

    1. Christian E. Weller & Ghazal Zulfiqar, 2013. "Financial Market Diversity and Macroeconomic Stability," Working Papers wp332, Political Economy Research Institute, University of Massachusetts at Amherst.

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