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Growth, Income Inequality, and Fiscal Policy: What are the Relevant Tradeoffs?

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  • Cecilia Garcia-Penalosa
  • Stephen 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.
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  • Cecilia Garcia-Penalosa & Stephen Turnovsky, "undated". "Growth, Income Inequality, and Fiscal Policy: What are the Relevant Tradeoffs?," Working Papers UWEC-2006-27-P, University of Washington, Department of Economics.
    • Handle: RePEc:udb:wpaper:uwec-2006-27-p
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