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Progressive Taxation and Economic Stability

Diana Alessandrini ()

Scandinavian Journal of Economics, 2021, vol. 123, issue 2, 422-452

Abstract: Recent empirical evidence finds that progressive taxation is an effective economic stabilizer, but theoretical results disagree. This paper shows that a lifecycle model with total factor productivity shocks can match the empirical evidence. If the US economy switched from progressive to proportional taxation, output volatility would increase by 5 percent. Progressive taxes act as stabilizers by reducing income volatility among the young and soon‐to‐be retirees. Thus, incorporating a rich lifecycle structure in the model is important to match the data. The model is then used to study the welfare implications of reducing tax progressivity.

Date: 2021
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https://doi.org/10.1111/sjoe.12410

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Scandinavian Journal of Economics is currently edited by Richard Friberg, Matti Liski and Kjetil Storesletten

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