The incidence of tax rates on workers’ debt stability and demand regimes

Abstract

This paper explores different tax regimes in a Post Keynesian model where workers get into debt to emulate the consumption of upper-income classes. The government taxes income to fund a social wage that would reduce workers’ need to get into debt. Three tax regimes are analyzed: taxing profits, managers’ wages, or both. In a numerical exercise, we explore the effects of changing the within-wage and functional inequalities. The government’s income tax choices and the wage bill’s distribution matter for the economy’s sustainability and the relationship between distribution and growth. The demand regime of the economy is not independent of policy. Taxing only profits and reducing wage inequality are the best possible outcomes in the model if we were to wind down the unsustainability feature of neoliberalism without sacrificing real performance.