UC Riverside

We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one-sector AK model of endogenous growth with utility-generating government purchases of goods and services. In sharp contrast to traditional Keynesian-type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief-driven fluctuations in our endogenously growing macroeconomy. Unlike the no-sustained-growth counterpart, this instability result is obtained regardless of (i) the degree of the public-spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.