Taxation and Income Distribution Dynamics in a Neoclassical Growth Model
AbstractWe examine how changes in tax policies affect the dynamics of the distributions of wealth and income in a Ramsey model in which agents differ in their initial capital endowment. The endogeneity of the labor supply plays a crucial role in determining inequality, as tax changes that affect hours of work will affect the distribution of wealth and income, reinforcing or offsetting the direct redistributive impact of taxes. Our results indicate that tax policies that reduce the labor supply are associated with lower output but also with a more equal distribution of after-tax income. We illustrate these effects by examining the impact of recent tax changes observed in the US and in European economies.
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Date of creation: 24 Nov 2008
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taxation; wealth distribution; income distribution; endogenous labor supply; transitional dynamics;
Other versions of this item:
- Cecilia García‐Peñalosa & Stephen J. Turnovsky, 2011. "Taxation and Income Distribution Dynamics in a Neoclassical Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1543-1577, December.
- NEP-ALL-2008-12-01 (All new papers)
- NEP-DGE-2008-12-01 (Dynamic General Equilibrium)
- NEP-PUB-2008-12-01 (Public Finance)
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