Progressive taxation and (in)stability in an exogenous growth model with an informal sector

Vasilev, Aleksandar (2017) Progressive taxation and (in)stability in an exogenous growth model with an informal sector. Journal of Economics and Econometrics, 60 (2). pp. 1-13. ISSN 2032-9652

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Progressive taxation and (in)stability in an exogenous growth model with an informal sector
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Abstract

We show that in a exogenous growth model with informal economy calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the the presence of an unofficial production. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Under the flat tax regime (2008-14), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the "sink" dynamics.

Keywords:Progressive taxation, Informal Sector, Equilibrium (In)determinacy
Subjects:L Social studies > L130 Macroeconomics
Divisions:Lincoln International Business School
ID Code:46897
Deposited On:19 Nov 2021 12:15

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