Progressive Taxation and the Real Business Cycle

The paper aims to study the impact of the introduction of a progressive labor income tax scheme over the real business cycle in contrast to a model economy with proportional labor income tax. While in most recent quantitative business cycle studies the proportional tax is introduced due to the easy tractability of this tax struture, the presence of a progressive tax on labor income, which is common to all economies the business cycle studies try to mimic, could introduce some important and distictive features into the cycle's statistical properties under analysis. The summary statistics of the dynamic pattern of the main aggregate variables show a clear e ect of the introduction of progressive labor income taxes. This model economy generates a higher volatility for the aggregate series compared to the ones obtained by the basic model with proportional taxes, displaying some characteristics present in the U.S. time series data. The author would like to thank Bassam Bamieh, Mark Huggett, Gary Hansen, Anne Villamil, Rolando Guzm an, Gustavo Ventura and Maur cio Bugarin for helpful comments. None of the above is responsible for errors or opinions expressed.