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A NOTE ON PROGRESSIVE TAXATION, NOMINAL-WAGE RIGIDITY, AND BUSINESS CYCLE DESTABILIZATION

Published online by Cambridge University Press:  16 July 2019

Miroslav Gabrovski  and
Jang-Ting Guo
Miroslav Gabrovski
Affiliation:
University of Hawaii
Jang-Ting Guo*
Affiliation:
University of California
*
Address correspondence to: Jang-Ting Guo, Department of Economics, University of California, Riverside, Riverside, CA 92521, USA. e-mail: [email protected]. Phone: 1-951-827-1588. Fax: 1-951-827-5685.
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Abstract

In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal-wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical fluctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is sufficiently low.

Keywords

Progressive TaxationNominal-Wage RigidityAutomatic StabilizerBusiness Cycles
Type
Notes
Information
Macroeconomic Dynamics , Volume 25 , Issue 4 , June 2021 , pp. 1112 - 1125
Copyright
© Cambridge University Press 2019

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Footnotes

We thank Nicolas Caramp, Juin-Jen Chang, Yi Mao, Victor Ortego-Marti, Chong-Kee Yip, and seminar participants at Academia Sinica, Chinese University of Hong Kong, Chinese University of Hong Kong-Shenzhen, Asian Meeting of the Econometric Society, and North American Meeting of the Econometric Society for helpful comments and suggestions. Part of this research was conducted while Guo was a visiting research fellow at the Institute of Economics, Academia Sinica, whose hospitality is greatly appreciated. Of course, all remaining errors are own own.

References

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