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Progressive Taxation and Economic Stability *
Author(s) -
Alessandrini Diana
Publication year - 2021
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12410
Subject(s) - economics , volatility (finance) , welfare , macroeconomics , productivity , empirical evidence , monetary economics , econometrics , market economy , philosophy , epistemology
Recent empirical evidence finds that progressive taxation is an effective economic stabilizer, but theoretical results disagree. This paper shows that a lifecycle model with total factor productivity shocks can match the empirical evidence. If the US economy switched from progressive to proportional taxation, output volatility would increase by 5 percent. Progressive taxes act as stabilizers by reducing income volatility among the young and soon‐to‐be retirees. Thus, incorporating a rich lifecycle structure in the model is important to match the data. The model is then used to study the welfare implications of reducing tax progressivity.