Tax Progressivity, Economic Booms, and Trickle-Up Economics

Laura E. Jackson, Christopher Otrok and Michael Owyang
Authors registered in the RePEc Author Service: Laura Jackson and Laura Jackson Young

No 2019-034, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study the macroeconomic and distributional effects of changes in income tax progressivity in the United States. We propose a method to decompose changes in the tax structure into orthogonal components measuring the level and progressivity of taxes. Estimating these components jointly with macroeconomic outcomes in a factor-augmented VAR, we find that tax level shocks are contractionary, while tax progressivity shocks are expansionary, raising output and consumption by shifting disposable income from high to low-income households. Despite being revenue neutral by construction, progressivity shocks raise tax revenue over time and increase income inequality through general equilibrium effects benefiting capital-owning households. A simple two-agent New Keynesian model illustrates the mechanism.

Keywords: taxes; income inequality; factor-augmented VAR (FAVAR) (search for similar items in EconPapers)
JEL-codes: C32 C38 E62 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-11-14, Revised 2026-03-12
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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Working Paper: Tax Progressivity, Economic Booms and Trickle-Up Economics (2025)
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DOI: 10.20955/wp.2019.034

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