Are Progressive Income Taxes Stabilizing?

Nicolas Dromel and Patrick Pintus

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle- point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after-tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation-driven business fluctuations.

Keywords: Stabilization; Progressive Income Taxes; Business Cycles; Sunspots; Stabilization. (search for similar items in EconPapers)
Date: 2008-06
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Citations: View citations in EconPapers (32)

Published in Journal of Public Economic Theory, 2008, 10 (3), pp.329-349. ⟨10.1111/j.1467-9779.2008.00365.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00640857

DOI: 10.1111/j.1467-9779.2008.00365.x

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