Progressive Taxation and Economic Stability
Diana Alessandrini ()
Scandinavian Journal of Economics, 2021, vol. 123, issue 2, 422-452
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.
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Persistent link: https://EconPapers.repec.org/RePEc:bla:scandj:v:123:y:2021:i:2:p:422-452
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