Openness, income-tax progressivity, and inflation |
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Authors: | Joseph P Daniels David D VanHoose |
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Institution: | aDepartment of Economics, Marquette University, P.O. Box 1881, Milwaukee, WI 53201, United States;bHankamer School of Business, Baylor University, One Bear Place #98003, Waco, TX 76798, United States |
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Abstract: | This paper considers a model of an open economy in which the degree of income-tax progressivity influences the interaction among openness, central bank independence, and the inflation rate. Our model suggests that an increase in the progressivity of the tax system induces a smaller response in real output to a change in the price level. This implies that increased income-tax progressivity reduces the equilibrium inflation rate and that the effect of increased income-tax progressivity on inflation is smaller when the central bank places a higher weight on inflation or when there is greater openness. Examination of cross-country inflation data provides empirical support for these key predictions. |
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Keywords: | Openness Inflation Tax progressivity |
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