 Progressive income taxes and macroeconomic instabilityMPRA Paper from University Library of Munich, Germany 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) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:49917 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
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