Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80858
Authors: 
Kremer, Jana
Stähler, Nikolai
Year of Publication: 
2013
Series/Report no.: 
IAAEU Discussion Paper Series in Economics 05/2013
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 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.
Subjects: 
Tax Progression
Business Cycles
Automatic Stabilizers
Welfare
JEL: 
H2
J6
E32
E62
Document Type: 
Working Paper

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