Income Tax Reductions in Production Networks

We analytically characterize the comparative statics of the macroeconomy after in- come tax reductions in which productions are organized in networks. We contribute to the literature by showing that the sectoral income tax reductions’s first-order effect on the GDP is given by a sufficient statistics: the product of the sectoral labor demand elasticity and sectoral Domar weight minus the sectoral labor share in the total labor supply. Around the efficient economy, the first-order effect is zero as other real distor- tions in the literature