Munich Personal RePEc Archive

The impact of labor income tax progressivity on the fiscal multipliers in the context of fiscal consolidation programs

Santos, Mariana (2020): The impact of labor income tax progressivity on the fiscal multipliers in the context of fiscal consolidation programs.

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Abstract

Fiscal multipliers depend on several structural characteristics of each economy. In this work project it is argued that labor income tax progressivity lowers fiscal multipliers of fiscal consolidation programs. By calibrating a model with incomplete-markets and overlapping generations for the United States, for different values of the labor income tax progressivity, it is shown that as progressivity increases, the recessionary impacts of fiscal consolidation programs are lower in the case of consolidation through decrease of government spending and are more recessionary in the case of consolidation financed with tax hikes. The first case is explained through the positive relationship between labor tax progressvity and the percentage of borrowing constrained agents in the economy. In the second case the results are linked to the distortionary effects in the economy of increasing tax progressivity.

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