Structural and cyclical effects of tax progression

Jana Kremer and Nikolai Stähler

No 15/2013, Discussion Papers from Deutsche Bundesbank

Abstract: In a real business cycle model with labor market frictions, we find that a more progressive tax schedule reduces structural unemployment as it fosters long-run incentives for job creation. Because there exists an optimal level of unemployment in a matching environment ('Hosios condition'), tax progression improves steadystate welfare up to a certain threshold and harms it beyond that. However, tax progression increases the costs of business cycles for those consumers who can save and borrow, while it reduces the business cycle costs for households with limited asset market participation ('rule-of-thumb' consumers). Our analysis suggests that business cycle effects dominate steady-state effects. On the aggregate level, tax progression is welfare-enhancing up to a certain threshold and always shifts relative utility from optimizing to rule-of-thumb consumers. These findings are quite robust to alternative calibrations of our model.

Keywords: Tax Progression; Business Cycles; Automatic Stabilizers; Welfare (search for similar items in EconPapers)
JEL-codes: E32 E62 H2 J6 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-acc, nep-dge, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/73658/1/745731457.pdf (application/pdf)

Related works:
Journal Article: Structural and Cyclical Effects of Tax Progression (2016)
Working Paper: Structural and Cyclical Effects of Tax Progression (2013)
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:zbw:bubdps:152013

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().