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PROGRESSIVE TAXATION, ENDOGENOUS GROWTH, AND MACROECONOMIC (IN)STABILITY
Author(s) -
Chen ShuHua,
Guo JangTing
Publication year - 2016
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12062
Subject(s) - economics , indeterminacy (philosophy) , context (archaeology) , endogenous growth theory , growth model , overlapping generations model , uniqueness , macroeconomics , microeconomics , keynesian economics , market economy , paleontology , mathematical analysis , physics , mathematics , quantum mechanics , biology , human capital
In the context of a standard one‐sector A K model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief‐driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle‐path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self‐fulfilling expectations or sunspots.