Advertisement

Journal of Economics

, Volume 125, Issue 1, pp 51–68 | Cite as

Progressive taxation and macroeconomic stability in two-sector models with social constant returns

  • Been-Lon Chen
  • Mei Hsu
  • Yu-Shan Hsu
Article
  • 82 Downloads

Abstract

It has been shown that, in the two-sector Benhabib–Farmer–Guo model with technologies of social increasing returns that exhibits indeterminacy, progressive income taxes de-stabilize the economy. This paper revisits the robustness of the tax implication in the two-sector Benhabib–Nishimura model with technologies of social constant returns that exhibits indeterminacy. We show that a progressive income tax stabilizes the economy against sunspot fluctuations, and thus the tax implication based on the two-sector Benhabib–Farmer–Guo model is not robust.

Keywords

Two-sector model Progressive income taxes Indeterminacy No-income-effect utility Social constant returns 

JEL Classification

E32 O41 

Notes

Acknowledgements

We have benefitted from comments by two anonymous referees. Earlier versions have benefitted from discussion and suggestions by Kazuo Nishimura, Ping Wang, Kazuo Mino, Chonh Yip, and participants of the International Conference on Trade, Financial Integration and Economic Growth (Kobe).

References

  1. Auerbach AJ, Feenberg D (2000) The significance of federal taxes as automatic stabilizers. J Econ Perspect 14:37–56CrossRefGoogle Scholar
  2. Benhabib J, Farmer R (1994) Indeterminacy and increasing returns. J Econ Theory 63:19–41CrossRefGoogle Scholar
  3. Benhabib J, Farmer R (1996) Indeterminacy and sector-specific externalities. J Monet Econ 37:421–443CrossRefGoogle Scholar
  4. Benhabib J, Farmer R (1999) Indeterminacy and sunspots in macroeconomics. In: Taylor J, Woodford M (eds) Handbook of macroeconomics. North Holland, Amsterdam, pp 387–448CrossRefGoogle Scholar
  5. Benhabib J, Nishimura K (1998) Indeterminacy and sunspots with constant returns. J Econ Theory 81:58–96CrossRefGoogle Scholar
  6. Benhabib J, Nishimura K, Venditti A (2002) Indeterminacy and cycles in two-sector discrete-time model. Econ Theory 20:217–235CrossRefGoogle Scholar
  7. Chen S-H, Guo J-T (2013a) Progressive taxation and macroeconomic (in)stability with productive government spending. J Econ Dyn Control 37:951–963CrossRefGoogle Scholar
  8. Chen S-H, Guo J-T (2013b) On indeterminacy and growth under progressive taxation and productive government spending. Can J Econ 46:865–880CrossRefGoogle Scholar
  9. Chen S-H, Guo J-T (2014) Progressive taxation and macroeconomic (in)stability with utility-generating government spending. J Macroecon 42:174–183CrossRefGoogle Scholar
  10. Chen S-H, Guo J-T (2016) Progressive taxation, endogenous growth, and macroeconomic (in)stability. Bull Econ Res 68:20–27CrossRefGoogle Scholar
  11. Chen S-H, Guo J-T (2017) On indeterminacy and growth under progressive taxation and utility-generating government spending. Pac Econ Rev.  https://doi.org/10.1111/1468-0106.12210 Google Scholar
  12. Chen B-L, Hsu Y-S, Mino K (2015) Welfare implications and equilibrium indeterminacy in a two-sector growth model with consumption externalities. Macroecon Dyn 19:535–577CrossRefGoogle Scholar
  13. Chen B-L, Lee, S-F, Raurich X (2018) Non-separable utilities and aggregate instability. Working paper, Academia Sinica, TaipeiGoogle Scholar
  14. Christiano L, Harrison S (1999) Chaos, sunspots, and automatic stabilizers. J Monet Econ 44:30–31CrossRefGoogle Scholar
  15. Dufourt F, Nishimura K, Venditti A (2015) Indeterminacy and sunspots in two-sector RBC models with generalized no-income-effect preferences. J Econ Theory 157:1056–1080CrossRefGoogle Scholar
  16. Farmer R, Guo J-T (1994) Real business cycles and the animal spirits hypothesis. J Econ Theory 63:42–72CrossRefGoogle Scholar
  17. Garnier J-P, Nishimura K, Venditti A (2013) Local indeterminacy in continuous-time models: the role of returns to scale. Macroecon Dyn 17:326–355CrossRefGoogle Scholar
  18. Guo J-T, Harrison SG (2001) Tax policy and stability in a model with sector-specific externalities. Rev Econ Dyn 4:75–89CrossRefGoogle Scholar
  19. Guo J-T, Harrison SG (2010) Indeterminacy with no-income-effect preferences and sector-specific externalities. J Econ Theory 145:287–300CrossRefGoogle Scholar
  20. Guo J-T, Harrison SG (2015) Indeterminacy with progressive taxation and sector-specific externalities. Pac Econ Rev 20:268–281CrossRefGoogle Scholar
  21. Guo J-T, Lansing KJ (1998) Indeterminacy and stabilization policy. J Econ Theory 82:481–490CrossRefGoogle Scholar
  22. Greenwood J, Hercovitz Z, Huffman G (1988) Investment, capacity utilization and the real business cycle. Am Econ Rev 78:402–417Google Scholar
  23. Harrison SG (2001) Indeterminacy in a model with sector-specific externalities. J Econ Dyn Control 25:747–764CrossRefGoogle Scholar
  24. Mathews T (2014) Historical trends in the degree of federal income tax progressivity in the United States. Soc Sci J 51:90–99CrossRefGoogle Scholar
  25. Mino K (2001) Indeterminacy and endogenous growth with social constant returns. J Econ Theory 97:203–222CrossRefGoogle Scholar
  26. Nishimura K, Venditti A (2007) Indeterminacy in discrete-time infinite-horizon models with non-linear utility and endogenous labor. J Math Econ 43:446–476CrossRefGoogle Scholar
  27. Weder M (2000) Animal spirits, technology shocks and the business cycle. J Econ Dyn Control 24:273–295CrossRefGoogle Scholar
  28. Wen Y (1998) Capacity utilization under increasing returns to scale. J Econ Theory 81:7–36CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Austria, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Institute of Economics, Academia SinicaTaipeiTaiwan
  2. 2.College of ManagementNational Taiwan Normal UniversityTaipeiTaiwan
  3. 3.Department of EconomicsNational Chung Cheng UniversityMin-Hsiung Chia-YiTaiwan

Personalised recommendations