Title: Tax progressivity
Authors: Michael Owyang - Federal Reserve Bank of St Louis (United States) [presenting]
Laura Jackson Young - Bentley University (United States)
Christopher Otrok - University of Missouri and FRB St Louis (United States)
Nora Traum - HEC Montreal (Canada)
Abstract: The empirical analysis of tax policy has generally been limited to the study of the effect of changes in tax revenue. This approach may ignore important distributional effects. We consider the effect of revenue neutral increases in tax progressivity. Greater progressivity implies a higher tax burden for higher incomes and a lower tax burden for lower incomes. We develop an empirical measure of progressivity jointly with a measure of the tax revenue level. We find that a shock to the level of taxes produces similar effects as has been found in the previous literature. Moreover, we find that a positive shock to tax progressivity increases output, suggesting that lowering taxes on the low end of the income distribution is more expansionary than raising taxes on the high end. We then consider the channels through which tax progressivity can affect output, consumption, and inequality.