Progressive Income Tax and Its Emerging Growth Effects: A Complex System Approach

Abstract

In this article, we apply an agent-based stock-flow consistent model (AB-SFC) to analyze economic growth differences when establishing different types of taxes on personal income: proportional and progressive. We use an income tax design that distinguishes between two sections of income. We contribute to the prominent literature on macro agent-based models by providing an unexplored feature in the income tax scheme. Our main findings are that this tax design seems to offset the inequality through tax exemption for low-income households but seems to have a limited impact on inequality generated between middle and high-income households. Notably, we did not find evidence of a deterioration in economic growth in the presence of a progressive income tax instead of a proportional one. Therefore, this article proposes a scenario where changing the tax scheme reduces inequality without hampering growth. This result has important implications for policy.