Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

Erkki Koskela and Mikko Puhakka

FinanzArchiv: Public Finance Analysis, 2006, vol. 62, issue 2, 149-167

Abstract: We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

Keywords: overlapping generations; endogenous cycles; proportional and progressive taxes; indeterminacy (search for similar items in EconPapers)
JEL-codes: D91 E32 H30 (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1628/001522106X120631

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