Progressive income taxes and macroeconomic instability

Mohanad Ismael

Montenegrin Journal of Economics, 2014, vol. 10, issue 2, 49-61

Abstract: This paper aims to study the stability properties of a two-period over-lapping generations model with a progressive labor-income taxation rule. In this case, wage income tax rates are increasing with agent’s income. Each representative agent lives two periods: youth and adulthood. In the first period, agents choose labor supply and allocate their after-tax income between consumptions and savings (capital accumulations). In the second period, agents are retired and consume entirely their savings returns. It is shown that progressive labor-income taxation policy acts as a destabilizing factor in the sense that a higher progressivity makes the emergence of indeterminacy and endogenous fluctuations more likely.

Date: 2014
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