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Openness, Income-Tax Progressivity, and Inflation

Joseph Daniels and David VanHoose

No 704, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: This paper considers a model of an open economy in which the degree of income-tax progressivity influences the interaction among openness, central bank independence, and the inflation rate. Our model suggests that an increase in the progressivity of the tax system induces a smaller response in real output to a change in the price level. This implies that increased income-tax progressivity reduces the equilibrium inflation rate and that the effect of increased income-tax progressivity on inflation is smaller when the central bank places a higher weight on inflation or when there is greater openness. Examination of cross-country inflation data provides empirical support for these key predictions.

Keywords: Openness; Tax Progressivity; Inflation (search for similar items in EconPapers)
JEL-codes: F40 F41 F43 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2007-04
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Published in the Journal of Macroeconomics, Vol 31(3), 2009, pages 485-491

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http://www.busadm.mu.edu/mrq/workingpapers/wpaper0704.pdf First Version, 2006-10 (application/pdf)

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Journal Article: Openness, income-tax progressivity, and inflation (2009) Downloads
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