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Tax Progressivity, Economic Booms, and Trickle-Up Economics


Abstract: We study the macroeconomic and distributional effects of changes in income tax progressivity in the United States. We propose a method to decompose changes in the tax structure into orthogonal components measuring the level and progressivity of taxes. Estimating these components jointly with macroeconomic outcomes in a factor-augmented VAR, we find that tax level shocks are contractionary, while tax progressivity shocks are expansionary, raising output and consumption by shifting disposable income from high to low-income households. Despite being revenue neutral by construction, progressivity shocks raise tax revenue over time and increase income inequality through general equilibrium effects benefiting capital-owning households. A simple two-agent New Keynesian model illustrates the mechanism.

JEL Classification: C32; C38; E62;

https://doi.org/10.20955/wp.2019.034

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2026-03-12

Number: 2019-034

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