Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73658
Authors: 
Kremer, Jana
Stähler, Nikolai
Year of Publication: 
2013
Series/Report no.: 
Discussion Paper, Deutsche Bundesbank 15/2013
Abstract: 
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 steadystate 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.
Subjects: 
Tax Progression
Business Cycles
Automatic Stabilizers
Welfare
JEL: 
H2
J6
E32
E62
ISBN: 
978-3-86558-912-5
Document Type: 
Working Paper

Files in This Item:
File
Size
420.41 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.