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On Indeterminacy and Growth under Progressive Taxation and Utility-Generating Government Spending

Author

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  • Jang-Ting Guo

    (Department of Economics, University of California Riverside)

  • Shu-Hua Chen

    (National Taipei University)

Abstract

We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector AK model of endogenous growth with utility-generating government purchases of goods and services. In sharp contrast to traditional Keynesian-type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief-driven fluctuations in our endogenously growing macroeconomy. This instability result is obtained regardless of (i) the degree of the public-spending preference externality, and (ii) whether private and public consumption expenditures are substitutes, complements, or additively separable in the household's utility function.

Suggested Citation

  • Jang-Ting Guo & Shu-Hua Chen, 2016. "On Indeterminacy and Growth under Progressive Taxation and Utility-Generating Government Spending," Working Papers 201604, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:201604
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    References listed on IDEAS

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    25. 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.
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    Cited by:

    1. Fujisaki, Seiya, 2017. "Equilibrium Determinacy in a Two-Tax System with Utility from Government Expenditure," MPRA Paper 81214, University Library of Munich, Germany.
    2. Been-Lon Chen & Mei Hsu & Yu-Shan Hsu, 2018. "Progressive taxation and macroeconomic stability in two-sector models with social constant returns," Journal of Economics, Springer, vol. 125(1), pages 51-68, September.
    3. Juin‐Jen Chang & Jang‐Ting Guo & Jhy‐Yuan Shieh & Wei‐Neng Wang, 2019. "Sectoral composition of government spending, distortionary income taxation, and macroeconomic (in)stability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(1), pages 95-107, March.
    4. Chen, Shu-Hua, 2019. "On economic growth and automatic stabilizers under linearly progressive income taxation," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 378-395.
    5. Guizhou Wang & Kjell Hausken, 2021. "Governmental Taxation of Households Choosing between a National Currency and a Cryptocurrency," Games, MDPI, vol. 12(2), pages 1-24, April.
    6. 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

    Progressive Income Taxation; Equilibrium (In)determinacy; Utility-Generating Government Spending; Endogenous Growth.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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