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Economic Growth And Inequality: The Role Of Fiscal Policies

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  • LEONEL MUINELO‐GALLO
  • ORIOL ROCA‐SAGALÉS

Abstract

This paper analyses the impact of different instruments of fiscal policy on economic growth as well as on income inequality, using an unbalanced panel of 43 upper-middle and high income countries for the period 1972-2006. We consider and estimate two individual equations explaining growth and inequality in order to assess the incidence of different fiscal policies. Firstly, our approach considers imposing orthogonal assumptions between growth and inequality in both equations, and secondly, it allows growth to be included in the inequality equation, and inequality to be included in the growth equation. The empirical results suggest that an increase in the size of government measured through current expenditures and direct taxes diminishes economic growth while reducing inequality, being public investment the only fiscal policy that may break this trade-off between efficiency and equity, since increases in this item reduces inequality without harming output. Therefore, the results reflect that the trade-off between efficiency and equity that governments often confront when designing their fiscal policies may be avoided.

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File URL: http://hdl.handle.net/10.1111/j.1467-8454.2011.00412.x
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Australian Economic Papers.

Volume (Year): 50 (2011)
Issue (Month): 2-3 (09)
Pages: 74-97

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Handle: RePEc:bla:ausecp:v:50:y:2011:i:2-3:p:74-97

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Cited by:
  1. Karen Davtyan, 2014. "“Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries”," IREA Working Papers 201405, University of Barcelona, Research Institute of Applied Economics, revised Feb 2014.
  2. Kaushik, Arun & Rupayan Pal, 2012. "Political strongholds and budget allocation for developmental expenditure: Evidence from Indian states, 1971-2005," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-015, Indira Gandhi Institute of Development Research, Mumbai, India.
  3. Leonel Muinelo-Gallo & Oriol Roca-Sagalés, 2012. "Joint determinants of fiscal policy, income inequality and economic growth," Documentos de Trabajo (working papers) 12-04, Instituto de Economía - IECON.
  4. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).
  5. Yongzheng Liu & Jorge Martinez-Vazquez, 2010. "The Growth-Inequality Tradeo in the Design of Tax Structure: Evidence from a Large Panel of Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1320, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Norman Gemmell & Joey Au, 2013. "Do Smaller Governments Raise the Level or Growth of Output? A Review of Recent Evidence," Review of Economics, Lucius & Lucius, vol. 64(2), pages 85-116.

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