Structural and cyclical effects of tax progression

Arbeitspapier

In a real business cycle model with labor market frictions, we find that a more progressive tax schedule reduces structural unemployment as it fosters long-run incentives for job creation. Because there exists an optimal level of unemployment in a matching environment (Hosios condition), tax progression improves steady-state welfare up to a certain threshold and harms it beyond that. However, tax progression increases the costs of business cycles for those consumers who can save and borrow, while it reduces the business cycle costs for households with limited asset market participation (rule-of-thumb consumers). Our analysis suggests that business cycle effects dominate steady-state effects. On the aggregate level, tax progression is welfare-enhancing up to a certain threshold and always shifts relative utility from optimizing to rule-of-thumb consumers. These findings are quite robust to alternative calibrations of our model.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IAAEU Discussion Paper Series in Economics ; No. 05/2013

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Fiscal Policy
• Subject: Tax Progression ; Business Cycles ; Automatic Stabilizers ; Welfare

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kremer, Jana ; Stähler, Nikolai
• Event: Veröffentlichung
• (who): University of Trier, Institute for Labour Law and Industrial Relations in the European Union (IAAEU)
• (where): Trier
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/80858
• Last update: 10.03.2025, 11:43 AM CET