Tax-and-Transfer Progressivity and Business Cycles

62 Pages Posted: 25 Jan 2023 Last revised: 2 Jun 2023

See all articles by Youngsoo Jang

Youngsoo Jang

University of Queensland - School of Economics

Takeki Sunakawa

Hitotsubashi University - Graduate School of Economics

Minchul Yum

University of Southampton; CEPR

Date Written: June 1, 2023

Abstract

This paper studies how tax-and-transfer progressivity influences aggregate fluctuations when interacting with household heterogeneity. Using a simple static model of the extensive margin labor supply, we analytically characterize how a degree of progressivity influences differential labor supply responses to aggregate conditions across heterogeneous households. We then build a quantitative dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that it delivers moderately procyclical average labor productivity and a large cyclical volatility of aggregate hours relative to output. Our quantitative exercises suggest that progressivity at the bottom of the income distribution shaped by the phasing out of transfers is key for these findings. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.

Keywords: Progressivity, targeted transfers, extensive margin labor supply, business cycles, redistributive policies

JEL Classification: E32, E24, H31, H53, E21

Suggested Citation

Jang, Youngsoo and Sunakawa, Takeki and Yum, Minchul, Tax-and-Transfer Progressivity and Business Cycles (June 1, 2023). Available at SSRN: https://ssrn.com/abstract=4335862 or http://dx.doi.org/10.2139/ssrn.4335862

Youngsoo Jang

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Takeki Sunakawa

Hitotsubashi University - Graduate School of Economics ( email )

Naka 2-1
Kunitachi, Tokyo 186-8601
Japan

Minchul Yum (Contact Author)

University of Southampton ( email )

Southampton
United Kingdom

CEPR ( email )

London
United Kingdom

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