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

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  • Vasilev, Aleksandar

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 fi ndings 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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  • Vasilev, Aleksandar, 2020. "Progressive taxation and (in)stability in an exogenous growth model with Epstein-Zin recursive preferences," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue forthcomi.
    • Handle: RePEc:zbw:espost:209538
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    References listed on IDEAS

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    1. Aleksandar Vasilev, 2015. "Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria’s 2008 flat tax reform," Economic Change and Restructuring, Springer, vol. 48(2), pages 169-185, May.
    2. Aleksandar Vasilev, 2018. "A Real-Business-Cycle model with reciprocity in labor relations and a government sector," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 61(2), pages 47-76.
    3. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April.
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    More about this item

    Keywords

    progressive taxation; equilibrium (in)determinacy; Epstein-Zin preferences; 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

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