Progressive taxation and macroeconomic (in)stability with utility-generating government spending

Shu-Hua Chen and Jang-Ting Guo

Journal of Macroeconomics, 2014, vol. 42, issue C, 174-183

Abstract: We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector real business cycle model with utility-generating government purchases of goods and services. When private and public consumption expenditures are complements in the household utility and the tax schedule is progressive, we analytically show that the economy exhibits indeterminacy and sunspots if and only if the degree of government-spending preference externality is higher than a critical threshold. Unlike traditional Keynesian-type stabilization policies, raising the tax progressivity may destabilize this version of our model by generating endogenous cyclical fluctuations. Moreover, the economy always displays saddle-path stability and equilibrium uniqueness under utility substitutability between private and public consumptions and progressive taxation.

Keywords: Progressive income taxation; Equilibrium (in)determinacy; Utility-generating government spending; Business cycles (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:42:y:2014:i:c:p:174-183

DOI: 10.1016/j.jmacro.2014.08.002

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