Progressive income taxes and macroeconomic instability

Mohanad Ismael ()

No 10-13, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper aims to study the stability properties of a two-period over- lapping generations model (OLG) with a progressive labor-income taxa- tion rule. In this case, wage income tax rates are increasing with agent's income. Each representative agent lives two periods: youth and adult- hood. In the first period, agents choose labor supply and allocate their after-tax income between consumptions and savings (capital accumula- tions). 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. These fluctuations appear if the elasticity of capital-labor substi- tution is sufficiently low. Moreover, we show that saving rate widens the range of parameters giving rise to endogenous fluctuations. The analytical findings are completed by a numerical example.

Keywords: Progressive income taxes; Indeterminacy; Overlapping generations; Endogenous labor supply (search for similar items in EconPapers)
JEL-codes: C62 E20 E32 H20 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2010
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Related works:
Working Paper: Progressive income taxes and macroeconomic instability (2011)
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