Structural and Cyclical Effects of Tax Progression

Jana Kremer and Nikolai Stähler

FinanzArchiv: Public Finance Analysis, 2016, vol. 72, issue 1, 41-73

Abstract: In a real-business-cycle model with labor market frictions, we find that a more progressive tax schedule fosters long-run incentives for job creation. Tax progression generally tends to decrease the costs of business cycles because of lower wage and employment volatility. However, the volatility of public revenues stemming from labor income taxation also increases. If the government uses revenue measures to balance its budget, this increases consumption volatility of households with limited asset market participation. The opposite holds whenever public consumption is used to balance the budget. Overall, tax progression is welfare-enhancing for low to intermediate degrees of progressivity.

Keywords: tax progression; business cycles; automatic stabilizers; welfare (search for similar items in EconPapers)
JEL-codes: E32 E62 H2 J6 (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: Structural and Cyclical Effects of Tax Progression (2013)
Working Paper: Structural and cyclical effects of tax progression (2013)
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DOI: 10.1628/001522108X14557023949292

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