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The interrelations between indeterminacy and progressive income tax rules are discussed in a one-sector real business cycle model with capacity utilization, productive increasing returns, and the Jaimovich-Rebelo preferences that exhibit varying degrees of income effect. When the values of income effect are large and the other parameter values are plausible, a moderately progressive income tax schedule can destabilize the economy by generating local indeterminacy. Moreover, numerical examples show that when an income tax schedule with a progressivity feature destabilizes the economy, the degree of income effect and the minimum level of increasing returns required for local indeterminacy are negatively related. These results are in contrast to those obtained in Guo and Lansing (1998), in which a progressive tax schedule can stabilize the one-sector economy with increasing returns. [ABSTRACT FROM AUTHOR]

In this paper, we utilize a real business cycle model with home production, productive increasing returns and the Jaimovich-Rebelo's preferences that allow for varying degrees of income effect, to show that when the values of income effect are intermediary and the level of increasing returns is reasonably high, the economy can be subject to local indeterminacy, provided that the other model parameters take reasonable values. In particular, we show that in the indeterminacy region, the minimum level of productive externality that induces instability increases as the income effect increases. [ABSTRACT FROM AUTHOR]