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Progressive Taxation and Macroeconomic Stability in Two‐sector Models with Social Constant Returns

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Abstract

It has been shown that, in the two‐sector Benhabib‐Farmer‐Guo model with technologies of social increasing returns that exhibits indeterminacy, progressive income taxes de‐stabilize the economy. This paper revisits the robustness of the tax implication in the two‐sector Benhabib‐Nishimura model with technologies of social constant returns that exhibits indeterminacy. We show that a progressive income tax stabilizes the economy against sunspot fluctuations, and thus the tax implication based on the two‐sector Benhabib‐Farmer‐Guo model is not robust.

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  • Been-Lon Chen & Mei Hsu & Yu-Shan Hsu, 2018. "Progressive Taxation and Macroeconomic Stability in Two‐sector Models with Social Constant Returns," IEAS Working Paper : academic research 18-A003, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    • Handle: RePEc:sin:wpaper:18-a003
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    Cited by:

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    3. Chen, Been-Lon & Hu, Yunfang & Mino, Kazuo, 2020. "Income Taxation Rules and Stability of a Small Open Economy," Journal of Macroeconomics, Elsevier, vol. 65(C).
    4. Shu-Hua Chen & Jang-Ting Guo, 2019. "Progressive taxation as an automatic destabilizer under endogenous growth," Journal of Economics, Springer, vol. 127(1), pages 47-71, June.

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    More about this item

    Keywords

    : two‐sector model; progressive income taxes; indeterminacy; no‐income‐effect utility; social constant returns;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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