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Working Paper
Tax Progressivity, Economic Booms, and Trickle-Up Economics
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 ...
Working Paper
Tax Progressivity, Economic Booms, and Trickle-Up Economics
We propose a method to decompose changes in the tax structure into orthogonal components measuring the level and progressivity of taxes. Similar to tax shocks found in the existing empirical literature, the level shock is contractionary. The tax progressivity shock is expansionary: Increasing tax progressivity raises (lowers) disposable income at the bottom (top) end of the income distribution by shifting the tax burden from the bottom to the top. If agents' marginal propensity to consume falls with income, the rise in consumption at the bottom more than compensates for the decline in ...