Progressive Taxation and Macroeconomic (In)stability with Productive Government Spending

Jang-Ting Guo and Shu-Hua Chen ()
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Shu-Hua Chen: National Taipei University

No 201006, Working Papers from University of California at Riverside, Department of Economics

Abstract: 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 aÌ 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.

Keywords: Progressive Income Taxation; Equilibrium (In)determinacy; Productive Gov- ernment Spending; Business Cycles (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2010-08, Revised 2010-08
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Citations: View citations in EconPapers (9)

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https://economics.ucr.edu/repec/ucr/wpaper/10-06.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: Progressive taxation and macroeconomic (In) stability with productive government spending (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:201006

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