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Income Skewness, Redistribution and Growth: A Reconciliation

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  • Carl-Johan Dalgaard

    (Institute of Economics, University of Copenhagen)

  • Henrik Hansen

    (Institute of Economics, University of Copenhagen)

  • Theo Larsen

    (World Bank)

Abstract

The so-called “fiscal policy approach" predicts that increases in income skewness should be associated with an intensification of redistributive efforts, at least in democracies. If redistribution is detrimental to growth, then this implies that a poor middle class is bad for long-run productivity; a prediction which has found empirical support. However, cross-country studies tend to find a negative association between income skewness and the amount of redistribution taking place, and, a positive relationship between redistributive taxation and growth. This paper offers a reconciliation of the existing theory and these puzzling findings. Specifically, the model predicts that the traditionally stipulated chains of causality holds within countries, whereas the puzzling correlations mentioned above may arise across countries. We provide a test of our explanation and find support for our approach using data on income taxes, taxes on property and expenditures on education.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 03-14.

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Length: 36 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:kud:epruwp:03-14

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Related research

Keywords: income distribution; political economy; endogenous growth;

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Cited by:
  1. Ahmet Faruk Aysan, 2006. "The Role of Efficiency of Redistributive Institutions on Redistribution: An Empirical Assessment," Working Papers 2006/14, Bogazici University, Department of Economics.
  2. Aysan, Ahmet Faruk, 2005. "The Shadowing Role of Redistributive Institutions in the Relationship Between Income Inequality and Redistribution," MPRA Paper 17772, University Library of Munich, Germany.
  3. Andreas Georgiadis & Alan Manning, 2012. "Spend it like Beckham? Inequality and redistribution in the UK, 1983–2004," Public Choice, Springer, vol. 151(3), pages 537-563, June.

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