Indexing the income tax code, monetary/fiscal interaction, and the great moderation

Andrew Keinsley

European Economic Review, 2016, vol. 89, issue C, 1-20

Abstract: This paper considers the consequences of automatically indexing the US federal income tax code to inflation. Indexation, implemented during the 1981 federal tax overhaul, and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard New Keynesian models with a generalized, progressive labor income tax. Additionally, fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply-side disturbances. Together, these results support a fiscal extension to the “good policy” hypothesis of the Great Moderation and encourage further indexation of the United States tax code.

Keywords: Monetary–fiscal coordination; Taxation; Inflation indexed; Great moderation (search for similar items in EconPapers)
JEL-codes: E31 E61 E63 H24 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:89:y:2016:i:c:p:1-20

DOI: 10.1016/j.euroecorev.2016.06.004

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