Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation

Mattesini, Fabrizio; Rossi, Lorenza

doi:10.1111/j.1538-4616.2012.00512.x

Cited by 20 publications

(34 citation statements)

References 58 publications

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“…However, their (and the rule-of-thumb households') labor supply decision is affected by the progressivity of the tax rate in that the labor supply elasticity is reduced. This implies that firms' marginal cost curves become steeper resulting in a different price setting behavior compared to a flat tax (Mattesini and Rossi 2012).…”

Section: Introductionmentioning

confidence: 99%

“…Our baseline model is the same as the one used by Mattesini and Rossi (2012): the standard New Keynesian model with a representative Ricardian household as in Galí (2008), augmented by government expenditure and a progressive tax on household labor income. In an extension to this baseline model, we allow for the presence of rule-of-thumb households as in Galí et al (2007).…”

Section: The Modelmentioning

confidence: 99%

“…We follow Mattesini and Rossi (2012) and assume that the government pursues a balanced budget rule. 11 The fiscal authority finances an exogenous stream of (stochastic) government 8 The subsidy (per unit of labor employed) would correspond to the value of the coefficient φ n .…”

Section: The Government 221 Fiscal Policymentioning

confidence: 99%

“…The traditional, demand side argument for them is based on progressive income taxes' effects on disposable income (Brown 1955): They reduce the volatility of the latter compared to the volatility of the market income and thereby stabilize aggregate demand and output. In modern DSGE models, in contrast, where households' intertemporal optimization renders disposable income irrelevant for aggregate demand, the stabilization properties occur through the supply side (Mattesini and Rossi 2012).…”

Section: Introductionmentioning

confidence: 99%

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The Macroeconomic Effects of Progressive Taxes and Welfare

Engler

Strehl

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. † A special thanks goes to Simon Voigts for helping with some of the programming. We also thank participants at Terms of use: Documents in

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Section: Introductionmentioning

confidence: 99%

Section: The Modelmentioning

confidence: 99%

Section: The Government 221 Fiscal Policymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Macroeconomic Effects of Progressive Taxes and Welfare

Engler

Strehl

2016

SSRN Journal

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“…Following Guo (1999), Guo and Lansing (1998) and Mattesini and Rossi (2012), we postulate that τ i t takes the form…”

Section: Householdsmentioning

confidence: 99%

Structural and Cyclical Effects of Tax Progression

Kremer¹,

Stähler²

2016

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Tax progression is a major attribute of current tax systems and a major element of redistribution policy. Theoretically, there is no clear answer to the question of how progressive taxes should be. In practice, approaches have differed both over time and from country to country. While top rates of income taxes have declined since the 1980s and the number of tax brackets has decreased in many countries, the overall progressivity of public tax and transfer systems has not necessarily been on a downward trend. Furthermore, top rates have been raised again as part of a number of recent consolidation packages, which has been seen as a new tendency towards higher tax progression. Besides implications for structural unemployment and income distribution, the dynamic properties of tax progression is attracting renewed interest. Given stronger calls for countercyclical fiscal policy and the shortcomings of ad hoc fiscal interventions in practice, it might be asked what role tax progression can play in the game of "timely, targeted and temporary" automatic stabilization.In this paper, we discuss distributional aspects of tax progression only very briefly and in a highly stylized manner. Instead, we focus on two other issues: the structural and cyclical consequences of a progressive tax system when labor markets are imperfect. In such economies, tax progression may curb workers' wage claims and, thus, decrease structural unemployment. Furthermore, changes in average tax rates over the business cycle induced by tax progression may dampen net income fluctuations. By combining these two issues in a real business cycle model with labor market frictions and creditconstrained consumers, we are able to assess, in particular, the relative importance of the structural and cyclical impact of tax progression on welfare.We find that a more progressive tax schedule reduces structural unemployment as it decreases wages and, thus, fosters long-run incentives for job creation. However, since the costs of filling a vacancy increase when unemployment falls, there exists an optimal level of unemployment ("Hosios condition"). Therefore, tax progression improves steady-state welfare up to a certain threshold and harms it beyond that. We also show that tax progression always increases the costs of business cycles for consumers who can shift consumption intertemporally through saving and borrowing (optimizers), while it always reduces the business cycle costs for credit constrained households (rule-of-thumb consumers). The latter is due to less volatile net wages, while the former follows from progressivity-induced tax rate volatility and an income effect resulting from employment stabilization. Our analysis suggests that the business cycle effect dominates the steadystate effect. Overall, tax progression seems welfare-enhancing up to a certain threshold and always shifts relative utility from optimizers to rule-of-thumb consumers. Nicht-technische Zusammenfassung AbstractIn a real business cycle model with labor market frictions, we find that a...

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Labor Income Tax and Output in a Panel of Central and Eastern European Countries: A Long-Run Perspective

Apergis

2015

Int Adv Econ Res

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Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation

Cited by 20 publications

References 58 publications

The Macroeconomic Effects of Progressive Taxes and Welfare

The Macroeconomic Effects of Progressive Taxes and Welfare

Structural and Cyclical Effects of Tax Progression

Labor Income Tax and Output in a Panel of Central and Eastern European Countries: A Long-Run Perspective

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