Can redistribution by means of a progressive labor income-taxation transfer system increase financial stability?
(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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- author
- Fischer, Thomas LU
- organization
- publishing date
- 2017-03-01
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- Debt, Financial stability, Income and wealth inequality, Redistribution
- in
- JASSS
- volume
- 20
- issue
- 2
- article number
- 3
- publisher
- University of Surrey
- external identifiers
-
- wos:000402671600011
- scopus:85016964843
- 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
- 2021-03-31 04:03:57
@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>},
author = {Fischer, Thomas},
issn = {1460-7425},
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},
doi = {10.18564/jasss.3405},
volume = {20},
year = {2017},
}