Progressive taxation and macroeconomic (In) stability with productive government spending (original) (raw)
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2020
This paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic (in)stability in an otherwise standard one-sector real business model with productive government spending. We analytically show that the economy exhibits indeterminacy and sunspots only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. Unlike in the framework with useless public expenditures, a less progressive tax policy may operate like an automatic stabilizer that mitigates belief-driven cyclical ‡uctuations. Our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in U.S. output volatility after the Tax Reform Act of 1986 was implemented.
Progressive taxation and macroeconomic (in)stability with utility-generating government spending
Journal of Macroeconomics, 2014
This paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic (in)stability in an otherwise standard one-sector real business model with productive government spending. We analytically show that the economy exhibits indeterminacy and sunspots only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. Unlike in the framework with useless public expenditures, a less progressive tax policy may operate like an automatic stabilizer that mitigates belief-driven cyclical ‡uctuations. Our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in U.S. output volatility after the Tax Reform Act of 1986 was implemented.
A Note on Progressive Taxation, Nominal-Wage Rigidity, and Business Cycle Destabilization
Macroeconomic Dynamics
In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal-wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical fluctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is sufficiently low.
Tax Policy and Stability in a Model with Sector-Specific Externalities
Review of Economic Dynamics, 2001
We show that in a two-sector real business cycle model with su¢ciently strong investment externalities, a regressive tax policy can stabilize the economy against ‡uctuations driven by agents' animal spirits. By contrast, this economy with a ‡at or progressive tax scheme (such as that in the U.S.) is more susceptible to indeterminacy and sunspot ‡uctuations. In the model with an aggregate constant returns-to-scale technology or a low investment externality, we show that a regressive tax policy can destabilize the economy by causing belief-driven ‡uctuations. Moreover, depending on the size of investment externalities and the slope parameter of the tax schedule, the economy exhibits various types of endogenous ‡uctuations, including Hopf or saddle-node bifurcations and stochastic sunspot equilibria.
2019
In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical uctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is su¢ cient low. Keywords: Progressive Taxation, Nominal Wage Rigidity, Automatic Stabilizer, Business Cycles. JEL Classi cation: E12, E32, E62, We thank Nicolas Caramp, Juin-Jen Chang, Yi Mao, Victor Ortego-Marti, Chong-Kee Yip, and seminar participants at Academia Sinica and Chi...
RePEc: Research Papers in Economics, 2017
This paper examines the interrelations between the sectoral composition of government spending and macroeconomic (in)stability in a two-sector real business cycle model with positive productive externalities in investment and a balanced-budget fiscal policy rule, whereby endogenous public expenditures are financed by the distortionary constant tax rate. Under the benchmark parameterization, our model always exhibits indeterminacy and sunspots provided the tax rate does not exceed a critical value. When the tax rate is raised to a higher level, a sufficiently high public-consumption share can destabilize the macroeconomy by generating belief-driven cyclical fluctuations. We also find that saddle-path stability and equilibrium uniqueness will prevail when the household's labor supply elasticity is not higher than a threshold level. In addition, analytical proofs for each of the aforementioned quantitative results are provided.
Problems of Economic Transition
We introduce progressive consumption taxation into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We investigate the quantitative importance of the presence of of progressive taxation of consumption expenditures for the stabilization of cyclical fluctuations in Bulgaria. We find the quantitative effect of such a tax to be very small, and thus not important for either business cycle stabilization, or public finance issues.
Indeterminacy with Progressive Taxation and Sector-Specific Externalities
Pacific Economic Review, 2015
This paper quantitatively examines the empirical plausibility of equilibrium indeterminacy and sunspot-driven cyclical ‡uctuations in a real business cycle model with two distinct production sectors that yield consumption and investment goods, together with separable or non-separable preferences. When calibrated to match the observed progressivity of the U.S. federal individual income tax schedule, each version of our model economy exhibits an indeterminate steady state under empirically realistic combinations of the household's labor supply elasticity and the degree of productive externalities in the investment goods sector. Therefore, macroeconomic instability due to agents'self-ful…lling expectations may in fact be a prevalent feature of the U.S. economy.
Progressive Taxation, Endogenous Growth, and Macroeconomic (In)Stability
Bulletin of Economic Research, 2015
In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate ‡uctuations under progressive taxation of income. When the tax schedule is regressive or ‡at, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical ‡uctuations driven by agents'self-ful…lling expectations or sunspots.