# Progressive taxation and macroeconomic stability in two-sector models with social constant returns

## Abstract

It has been shown that, in the two-sector Benhabib–Farmer–Guo model with technologies of *social increasing returns* that exhibits indeterminacy, progressive income taxes de-stabilize the economy. This paper revisits the robustness of the tax implication in the two-sector Benhabib–Nishimura model with technologies of *social constant returns* that exhibits indeterminacy. We show that a progressive income tax stabilizes the economy against sunspot fluctuations, and thus the tax implication based on the two-sector Benhabib–Farmer–Guo model is not robust.

## Keywords

Two-sector model Progressive income taxes Indeterminacy No-income-effect utility Social constant returns## JEL Classification

E32 O41## Notes

### Acknowledgements

We have benefitted from comments by two anonymous referees. Earlier versions have benefitted from discussion and suggestions by Kazuo Nishimura, Ping Wang, Kazuo Mino, Chonh Yip, and participants of the International Conference on Trade, Financial Integration and Economic Growth (Kobe).

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