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Openness, Income-Tax Progressivity, and Inflation

Author

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  • Joseph P. Daniels

    () (Center for Global and Economic Studies, Marquette University)

  • David D. VanHoose

    () (Hanmaker School of Business, Baylor University)

Abstract

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.

Suggested Citation

  • Joseph P. Daniels & David D. VanHoose, 2007. "Openness, Income-Tax Progressivity, and Inflation," Working Papers and Research 0704, Marquette University, Center for Global and Economic Studies and Department of Economics.
  • Handle: RePEc:mrq:wpaper:0704
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    File URL: http://www.busadm.mu.edu/mrq/workingpapers/wpaper0704.pdf
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    References listed on IDEAS

    as
    1. Duca, John V. & Van Hoose, David D., 2001. "The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy," Journal of Macroeconomics, Elsevier, pages 1-29.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, pages 589-610.
    3. Arthur van Soest & Isolde Woittiez & Arie Kapteyn, 1990. "Labor Supply, Income Taxes, and Hours Restrictions in the Netherlands," Journal of Human Resources, University of Wisconsin Press, pages 517-558.
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    5. Jay Bryson & Henrik Jensen & David Hoose, 1993. "Rules, discretion, and international monetary and fiscal policy coordination," Open Economies Review, Springer, pages 117-132.
    6. Duca, John V. & Van Hoose, David D., 2001. "The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy," Journal of Macroeconomics, Elsevier, pages 1-29.
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    9. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-379, April.
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    13. Daniels, Joseph P. & Nourzad, Farrokh & VanHoose, David D., 2006. "Openness, centralized wage bargaining, and inflation," European Journal of Political Economy, Elsevier, vol. 22(4), pages 969-988, December.
    14. Daniels, Joseph P. & VanHoose, David D., 2006. "Openness, the sacrifice ratio, and inflation: Is there a puzzle?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1336-1347, December.
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    Cited by:

    1. Daniels, Joseph P. & VanHoose, David D., 2013. "Exchange-rate pass through, openness, and the sacrifice ratio," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 131-150.

    More about this item

    Keywords

    Openness; Tax Progressivity; Inflation;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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