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Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

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  • Erkki Koskela
  • Mikko Puhakka

Abstract

We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

Suggested Citation

  • Erkki Koskela & Mikko Puhakka, 2006. "Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(2), pages 149-167, June.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200606)62:2_149:iasoec_2.0.tx_2-o
    DOI: 10.1628/001522106X120631
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    More about this item

    Keywords

    overlapping generations; endogenous cycles; proportional and progressive taxes; indeterminacy;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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