Progressive Taxation, Nominal Wage Rigidity, and Business Cycle Destabilization

Jang-Ting Guo and Miroslav Gabrovski

No 201913, Working Papers from University of California at Riverside, Department of Economics

Abstract: 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 sufficient low.

Keywords: Progressive Taxation; Nominal Wage Rigidity; Automatic Stabilizer; Business Cycles. (search for similar items in EconPapers)
JEL-codes: E12 E32 E62 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-dge and nep-mac
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economics.ucr.edu/repec/ucr/wpaper/201913.pdf First version, 2019 (application/pdf)

Related works:
Working Paper: Progressive Taxation, Nominal Wage Rigidity, and Business Cycle Destabilization (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:201913

Access Statistics for this paper

More papers in Working Papers from University of California at Riverside, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Kelvin Mac ().