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Growth, Income Inequality, and Fiscal Policy: What Are the Relevant Trade-offs?

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  • CECILIA GARCÍA-PE�ALOSA
  • STEPHEN J. TURNOVSKY

Abstract

We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this context, the growth rate and the distribution of income are jointly determined. We then examine the distributional impact of different ways of financing an investment subsidy. Policies aimed at increasing the growth rate result in a more unequal distribution of pre-tax income, consistent with the positive correlation between income inequality and growth observed in the recent empirical literature. However, there is no conflict between efficiency and equity if inequality is measured in terms of the distribution of welfare. Copyright 2007 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 2-3 (03)
Pages: 369-394

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:2-3:p:369-394

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Caselli, F. & Ventura, J., 1996. "A Representative Consumer Theory of Distribution," Working papers 96-11, Massachusetts Institute of Technology (MIT), Department of Economics.
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  11. Cardia, Emanuela & Kozhaya, Norma & Ruge-Murcia, Francisco J, 2003. " Distortionary Taxation and Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 350-73, June.
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  15. Anthony C. Atkinson, 2003. "Income Inequality in OECD Countries: Data and Explanations," CESifo Working Paper Series 881, CESifo Group Munich.
  16. Cecilia Garcia-Penalosa & Stephen Turnovsky, 2005. "Growth and Income Inequality: A Canonical Model," Working Papers UWEC-2006-04-P, University of Washington, Department of Economics, revised Jan 2005.
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Citations

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Cited by:
  1. Koyuncu, Murat, 2011. "Can progressive taxation account for cross-country variation in labor supply?," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1474-1488, September.
  2. Paul McNelis & Guay Lim, 2009. "Cyclical Government Spending, Income Inequality and Welfare in Small Open Economies," 2009 Meeting Papers 300, Society for Economic Dynamics.
  3. Cecilia Garcia-Peñalosa & Stephen Turnovsky, 2013. "Income Inequality, Mobility and the Accumulation of Capital," CESifo Working Paper Series 4559, CESifo Group Munich.
  4. de la CROIX, David & LUBRANO, Michel, 2009. "The tradeoff between growth and redistribution: ELIE in an overlapping generations model," CORE Discussion Papers 2009018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Desire Avom & Fabrizio Carmignani & Abdour Chowdhury, . "Four Scenarios of Poverty Reduction and the Role of Economic Policy," MRG Discussion Paper Series 3109, School of Economics, University of Queensland, Australia.
  6. Yoseph Yilma Getachew, 2012. "Distributional effects of public policy choices," Working Papers 2012_04, Durham University Business School.
  7. Getachew, Yoseph Yilma, 2010. "Public capital and distributional dynamics in a two-sector growth model," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 606-616, June.
  8. Atolia, Manoj & Chatterjee, Santanu & Turnovsky, Stephen J., 2012. "Growth and inequality: Dependence on the time path of productivity increases (and other structural changes)," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 331-348.
  9. Cecilia García-Peñalosa & Stephen J. Turnovsky, 2012. "Income Inequality, Mobility, and the Accumulation of Capital: The Role of Heterogeneous Labor Productivity," Working Papers halshs-00793209, HAL.
  10. 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.
  11. Viegas, Miguel & Ribeiro, Ana Paula, 2013. "Welfare-improving government behavior and inequality in a heterogeneous agents model," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 146-160.

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