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On indeterminacy and growth under progressive taxation and productive government spending

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  • Shu‐Hua Chen
  • Jang‐Ting Guo

Abstract

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one‐sector representative‐agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demand‐side effect of government purchases is weaker, the economy exhibits an indeterminate balanced‐growth equilibrium and belief‐driven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supply‐side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian‐type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’ self‐fulfilling expectations. Sur l'indétermination et la croissance quand la fiscalité est progressive et les dépenses gouvernementales productives. On examine les interrelations théoriques entre l'(in)détermination de l'équilibre et la croissance économique dans un modèle de croissance endogène (un secteur, agent représentatif) quand la fiscalité sur le revenu est progressive et le flux de dépenses publiques productif. On montre analytiquement que si l'effet du côté de la demande des achats gouvernementaux est relativement plus faible, cela se traduit par un équilibre de croissance balancée indéterminée et des fluctuations de la croissance alimentées par les croyances quand la cédule de taxation est suffisamment progressive ou régressive. Si l'effet du côté de l'offre des dépenses publiques est relativement plus faible, l'indétermination et les fluctuations émergent quand la fiscalité sur le revenu est progressive. Contrairement aux analyses traditionnelles de type keynesien des politiques de stabilisation, ces analyses montrent qu'augmenter la progresssivité de la fiscalité peut déstabiliser une économie avec croissance endogène quand les fluctuations sont alimentées par les anticipations auto‐réalisées des agents.

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  • Shu‐Hua Chen & Jang‐Ting Guo, 2013. "On indeterminacy and growth under progressive taxation and productive government spending," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(3), pages 865-880, August.
    • Handle: RePEc:wly:canjec:v:46:y:2013:i:3:p:865-880
    DOI: 10.1111/caje.12042
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