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Can redistribution by means of a progressive labor income-taxation transfer system increase financial stability?

Fischer, Thomas LU (2017) In JASSS 20(2).
Abstract

We present a model featuring heterogeneous households with a conspicuous consumptionmotive, in which inequality can decrease financial stability, and relate this behavior to the recent financial crisis in theUSA. A natural policy conclusion would be to combat income inequality jointly with financial instability by means of a progressive system of taxes and transfers. We investigate this for the case of a simple flat tax system on labor income. The system succeeds in decreasing volatility in asset markets by decreasing the share of high income individuals participating in destabilizing speculation. However, the model provides some very cautious notes on redistribution. As a result of redistribution, all agents areworse off class-wise and... (More)

We present a model featuring heterogeneous households with a conspicuous consumptionmotive, in which inequality can decrease financial stability, and relate this behavior to the recent financial crisis in theUSA. A natural policy conclusion would be to combat income inequality jointly with financial instability by means of a progressive system of taxes and transfers. We investigate this for the case of a simple flat tax system on labor income. The system succeeds in decreasing volatility in asset markets by decreasing the share of high income individuals participating in destabilizing speculation. However, the model provides some very cautious notes on redistribution. As a result of redistribution, all agents areworse off class-wise and accumulate large amounts of debt, posing another potential hazard to financial stability. The latter can be explained by the arms race property of relative consumption. Moreover, the decreased inequality of income (flow) is accompanied by an increased inequality of net-worth (stock).

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Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Debt, Financial stability, Income and wealth inequality, Redistribution
in
JASSS
volume
20
issue
2
publisher
University of Surrey
external identifiers
  • scopus:85016964843
  • wos:000402671600011
ISSN
1460-7425
DOI
10.18564/jasss.3405
language
English
LU publication?
yes
id
318fe587-20f4-4055-b071-08d8b93aa18d
date added to LUP
2017-05-03 09:25:42
date last changed
2018-01-07 12:01:25
@article{318fe587-20f4-4055-b071-08d8b93aa18d,
  abstract     = {<p>We present a model featuring heterogeneous households with a conspicuous consumptionmotive, in which inequality can decrease financial stability, and relate this behavior to the recent financial crisis in theUSA. A natural policy conclusion would be to combat income inequality jointly with financial instability by means of a progressive system of taxes and transfers. We investigate this for the case of a simple flat tax system on labor income. The system succeeds in decreasing volatility in asset markets by decreasing the share of high income individuals participating in destabilizing speculation. However, the model provides some very cautious notes on redistribution. As a result of redistribution, all agents areworse off class-wise and accumulate large amounts of debt, posing another potential hazard to financial stability. The latter can be explained by the arms race property of relative consumption. Moreover, the decreased inequality of income (flow) is accompanied by an increased inequality of net-worth (stock).</p>},
  articleno    = {3},
  author       = {Fischer, Thomas},
  issn         = {1460-7425},
  keyword      = {Debt,Financial stability,Income and wealth inequality,Redistribution},
  language     = {eng},
  month        = {03},
  number       = {2},
  publisher    = {University of Surrey},
  series       = {JASSS},
  title        = {Can redistribution by means of a progressive labor income-taxation transfer system increase financial stability?},
  url          = {http://dx.doi.org/10.18564/jasss.3405},
  volume       = {20},
  year         = {2017},
}