How Does Progressivity Affect the Tax Cut Multiplier?

Abstract

How does the targeting of personal income tax cuts affect the output multiplier? This paper provides quantitative evidence using a heterogeneous-agent New-Keynesian model calibrated to match US distributions of income, wealth, marginal tax rates, and marginal propensities to consume. Labor supply is determined by household preferences on the intensive margin and search frictions on the extensive margin. The model evaluates tax cuts for the bottom-90 (B90%) and top-10% of the income distribution in national and cross-region settings, replicating influential empirical research designs. B90 tax cuts generate larger output effects while incentive effects play a central role in transmission.