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Are Progressive Income Taxes Stabilizing?

Author

Listed:
  • Nicolas Dromel

    (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Patrick-Antoine Pintus

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle- point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after-tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation-driven business fluctuations.

Suggested Citation

  • Nicolas Dromel & Patrick-Antoine Pintus, 2008. "Are Progressive Income Taxes Stabilizing?," Post-Print halshs-00640857, HAL.
    • Handle: RePEc:hal:journl:halshs-00640857
    DOI: 10.1111/j.1467-9779.2008.00365.x
    as

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