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Income Skewness, Redistribution and Growth: A Reconciliation

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Author Info
Carl-Johan Dalgaard (Institute of Economics, University of Copenhagen)
Henrik Hansen (Institute of Economics, University of Copenhagen)
Theo Larsen (World Bank)

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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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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
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Handle: RePEc:kud:epruwp:03-14

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Related research
Keywords: income distribution; political economy; endogenous growth;

Find related papers by JEL classification:
D3 - Microeconomics - - Distribution
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Holger Strulik, 2007. "A distributional theory of government growth," Public Choice, Springer, vol. 132(3), pages 305-318, September. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!]
    Other versions:
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