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Progressive Taxation and Macroeconomic (In)stability with Utility-Generating Government Spending

Listed author(s):
  • Jang-Ting Guo

    ()

    (Department of Economics, University of California Riverside)

  • Shu-Hua Chen

    (National Taipei University)

We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical áuctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.

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File URL: http://economics.ucr.edu/repec/ucr/wpaper/13-02.pdf
File Function: First version, 2013
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Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201302.

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Date of creation: Apr 2013
Date of revision: Apr 2013
Handle: RePEc:ucr:wpaper:201302
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