On the role of progressive taxation in a Ramsey model with heterogeneous households

The aim of this paper is to study the role of progressive tax rules on the steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply is elastic, considering different tax rates on capital and labor incomes matters. Showing the existence of steady states where only the most patient households hold capital, we argue that working could not be optimal for them. Dynamics are addressed through a local analysis. In contrast to many contributions, progressive tax rules can promote expectation-driven fluctuations and endogenous cycles. Hence, progressivity can be an inopportune device to stabilize macroeconomic volatility.