Creator: Braun, R. Anton Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 506 Abstract:
This paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates. It finds that systematically including tax variables in a standard real business cycle model substantially improves the model's ability to reproduce basic facts about postwar U.S. business cycle fluctuations. In particular, modeling fluctuations in personal and corporate income tax rates increases the model's predicted relative variability of hours and decreases its predicted correlation between hours and average productivity. Fluctuations in tax rates produce large substitution effects that alter the leisure/labor supply decision.
Keyword: Business cycle, Real business cycle model, Taxation, Productivity, Tax, Corporate tax , Income tax, Tax rates, and Taxes Subject (JEL): E32 - Business Fluctuations; Cycles, H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes, and H25 - Business Taxes and Subsidies including sales and value-added (VAT)