DESCRIBING THE MACROECONOMY: THE ROLE OF STICKY TAXES

In this paper we describe and explore a simple macroeconomy with a progressive income tax and with both ad valorem and unit taxes on commodities. Despite the prevalence of such taxes in real‐world economies, in most theoretical macroeconomic models, both static and dynamic, direct taxes are linear on the various sources of income. The indirect taxes, if any, are all proportional. It seems important in an inflationary world to make explicit the effects of both elastic and ‘sticky’ revenue sources on the government's financing problem and in particular to investigate the sort of steady states that may be achieved in such economies.