Abstract
In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self-fulfilling expectations or sunspots.
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