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A NOTE ON BALANCED-BUDGET INCOME TAXES AND AGGREGATE (IN)STABILITY IN MULTI-SECTOR ECONOMIES

Published online by Cambridge University Press:  06 August 2019

Nicolas Abad  and
Alain Venditti
Nicolas Abad*
Affiliation:
Normandie Univ., UNIROUEN, CREAM
Alain Venditti
Affiliation:
Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE and EDHEC Business School
*
Address correspondence to: Nicolas Abad, 3 Avenue Pasteur, 76000 Rouen, France. e-mail: nicolas.abad@univ-rouen.fr.
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Abstract

We examine the impact of balanced-budget labor income taxes on the existence of expectation-driven business cycles in a two-sector version of the Schmitt-Grohé and Uribe (SGU) [(1997) Journal of Political Economy 105, 976–1000] model with constant government expenditures and counter-cyclical taxes. Our results show that the destabilizing impact of labor income taxes strongly depends on the capital intensity difference across sectors. Local indeterminacy is indeed more likely when the consumption good sector is capital intensive, as the minimal tax rate decreases, and less likely when the investment good sector is capital intensive, as the minimal tax rate increases. The implication of this result can be quantitatively significant. Indeed, when compared to SGU, local indeterminacy can be either completely ruled out for all OECD countries when the investment good is sufficiently capital intensive or drastically improved, delivering indeterminacy for a larger set of OECD countries, if the consumption good is sufficiently capital intensive. Focusing however on recent estimates of the sectoral capital shares corresponding to the empirically plausible case of a capital intensive consumption good, we find that there is a significant increase of the range of economically relevant labor tax rates (from a minimum tax rate of 30% to 24.7% for which local indeterminacy arises with respect to the aggregate formulation of SGU.

Keywords

Aggregate (In)stabilityLocal IndeterminacyExpectations-Driven FluctuationsLabor Income TaxesBalanced-Budget RuleInfinite-Horizon Two-Sector ModelCapital Intensity Difference
Type
Note
Information
Macroeconomic Dynamics , Volume 25 , Issue 3 , April 2021 , pp. 824 - 843
Copyright
© Cambridge University Press 2019

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Footnotes

This work was supported by the French National Research Agency Grants ANR-08-BLAN-0245-01 and ANR-17-EURE-0020. We thank the guest editor L. Gori and two anonymous referees together with F. Dufourt, K. Gente and T. Seegmuller for useful comments and suggestions.

References

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