Multiple equilibria and progressive taxation of labor income

This paper shows that in a one-sector real business cycle model with strong increasing returns in production, progressive taxation of labor income can stabilize the economy against sunspot fluctuations, even when the capital tax schedule is flat. This result is consistent with the US tax code in whi ch labor-income taxation is more progressive than capital-income taxation. (C) 1999 Elsevier Science S.A. All rights reserved.