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Fiscal opacity and reduction of income inequality through taxation: Effects on economic growth

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  • de Mendonça, Helder Ferreira
  • Baca, Adriana Cabrera

Abstract

We analyze the effect of fiscal opacity regarding the budget deficit and the reduction of income inequality through progressive direct taxation on economic growth. Using a sample of thirteen OECD countries from 1980–2016, we propose fiscal opacity indicators, through signal-to-noise ratios, that reflect the public’s ignorance regarding the budget deficit. Moreover, we calculate contraction factors to consider the income inequality through income taxation of heterogeneous households. The findings show that an increase in fiscal opacity decreases growth and that there is an asymmetric nature of redistributive taxation on economic growth. Furthermore, it is possible to conjecture that fiscal opacity can amplify income inequality’s asymmetric effect on growth.

Suggested Citation

  • de Mendonça, Helder Ferreira & Baca, Adriana Cabrera, 2022. "Fiscal opacity and reduction of income inequality through taxation: Effects on economic growth," The Quarterly Review of Economics and Finance, Elsevier, vol. 83(C), pages 69-82.
    • Handle: RePEc:eee:quaeco:v:83:y:2022:i:c:p:69-82
    DOI: 10.1016/j.qref.2021.11.006
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    More about this item

    Keywords

    Income inequality; Fiscal opacity; Economic growth; Contraction factor; Signal-to-noise ratio;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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