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

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

No 201302, Working Papers from University of California at Riverside, Department of Economics

Abstract: 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.

Keywords: Progressive Income Taxation; Equilibrium (In)determinacy; Utility-Generating. (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2013-04, Revised 2013-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Citations: View citations in EconPapers (8)

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https://economics.ucr.edu/repec/ucr/wpaper/13-02.pdf First version, 2013 (application/pdf)

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Journal Article: Progressive taxation and macroeconomic (in)stability with utility-generating government spending (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:201302

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