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Progressive taxation and (in)stability in an exogenous growth model with non-market ("home") production

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  • Aleksandar Vasilev

Abstract

We show that in a exogenous growth model with non-market (”home”) sector calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the presence of non-market production. 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. Under the flat tax regime (2008-16), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the ”stable focus” dynamics.

Suggested Citation

  • Aleksandar Vasilev, 2018. "Progressive taxation and (in)stability in an exogenous growth model with non-market ("home") production," EERI Research Paper Series EERI RP 2018/13, Economics and Econometrics Research Institute (EERI), Brussels.
  • Handle: RePEc:eei:rpaper:eeri_rp_2018_13
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    References listed on IDEAS

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    1. Vasilev, Aleksandar, 2015. "Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria's 2008 at tax reform. Technical Appendix," EconStor Research Reports 124186, ZBW - Leibniz Information Centre for Economics.
    2. 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.
    3. Juan Carlos Conesa Roca & Carlos Díaz Moreno & José Enrique Galdón Sánchez, 2001. "Underground economy and aggregate fluctuations," Spanish Economic Review, Springer;Spanish Economic Association, vol. 3(1), pages 41-53.
    4. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-1187, December.
    5. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    6. Vasilev, Aleksandar, 2015. "The welfare effect of flat income tax reform: the case of Bulgaria," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 53(3), pages 205-220.
    7. Aleksandar Vasilev, 2017. "Progressive taxation and (in)stability in an exogenous growth model with an informal sector," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 60(2), pages 1-13.
    8. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-290, May.
    9. Aleksandar Vasilev, 2016. "Progressive taxation and (in)stability in an endogenous growth model with human capital accumulation," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 59(2), pages 1-15.
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    More about this item

    Keywords

    Progressive taxation; Non-market Sector; Home Production; Equilibrium (In)determinacy.;
    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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