Openness, Income-Tax Progressivity, and Inflation
This paper considers a model of an open economy in which the degree of income-tax progressivity influences the interaction among openness, central bank independence, and the inflation rate. Our model suggests that an increase in the progressivity of the tax system induces a smaller response in real output to a change in the price level. This implies that increased income-tax progressivity reduces the equilibrium inflation rate and that the effect of increased income-tax progressivity on inflation is smaller when the central bank places a higher weight on inflation or when there is greater openness. Examination of cross-country inflation data provides empirical support for these key predictions.
|Date of creation:||Apr 2007|
|Date of revision:|
|Publication status:||Published in the Journal of Macroeconomics, Vol 31(3), 2009, pages 485-491|
|Contact details of provider:|| Postal: P.O. Box 1881, Milwaukee WI 53201-1881|
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Web page: http://business.marquette.edu/departments/economics/
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