Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability

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

No 201424, Working Papers from University of California at Riverside, Department of Economics

Abstract: 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 fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, 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 fluctuations driven by agents' self-fulfilling expectations or sunspots.

Keywords: Progressive Income Taxation; Endogenous Growth; Equilibrium (In)determinacy. (search for similar items in EconPapers)
JEL-codes: E62 O41 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-dge, nep-gro, nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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https://economics.ucr.edu/repec/ucr/wpaper/201424.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: PROGRESSIVE TAXATION, ENDOGENOUS GROWTH, AND MACROECONOMIC (IN)STABILITY (2016)
Working Paper: Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability (2015)
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