“Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability” by Prof. Jang-Ting Guo
University of California
National Taipei University
In the context of a standard one-sector AK 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 .at, 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.