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Can Progressive Taxation Contribute to Economic Development?

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Author Info
Christian E. Weller
Manita Rao
Abstract

Financial instability has increased for many economies in the face of greater capital mobility. Eliminating capital flows, especially portfolio investment flows, may reduce volatility, but it could also result in domestic capital constraints. To overcome this dilemma, policymakers may consider alternatives, such as progressive income taxation, that could raise domestic funds. In this paper, the authors combine several macroeconomic data sources to test the link between progressive taxation and economic stability, economic growth, inequality and fiscal policy. Based on data from 1981 to 2002, they find that progressive taxation provides policymakers with the ability to conduct countercyclical fiscal policies, which in turn contributes significantly to economic stability. They find no evidence that progressive taxation adversely affects economic stability by reducing growth.

The authors do find that the possibility of raising progressivity is constrained by capital mobility and by the level of government spending. And policymakers, who may consider consumption taxes such as the value added taxes (VAT), when tax enforcement is ineffective, would see no additional gains in terms of economic stability from the implementation of a VAT in combination with progressive income taxation.

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp176.

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Date of creation: 2008
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Handle: RePEc:uma:periwp:wp176

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Related research
Keywords: Progressive personal income taxation; value added taxes; long-term growth; economic stability; income inequality; government revenue; fiscal balances.;

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  4. Glenn P. Jenkins & Hatice Jenkins & Chun-Yan Kuo, 2006. "Is the Value Added Tax Naturally Progressive?," Working Papers 1059, Queen's University, Department of Economics. [Downloadable!]
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  6. Philip Arestis & Panicos Demetriades, 1999. "Financial Liberalization: The Experience of Developing Countries," Eastern Economic Journal, Eastern Economic Association, vol. 25(4), pages 441-457, Fall. [Downloadable!]
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  8. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
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  15. Levine, Ross, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Blackwell Publishing, vol. 9(4), pages 688-702, November. [Downloadable!] (restricted)
  16. ELIZABETH M. CAUCUTT & SELAHATTIN İMROHOROĞLU & KRISHNA B. KUMAR, 2006. "Does the Progressivity of Income Taxes Matter for Human Capital and Growth?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 95-118, 01. [Downloadable!] (restricted)
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  20. Balassa, Bela, 1989. "Tariff policy and taxation in developing countries," Policy Research Working Paper Series 281, The World Bank. [Downloadable!]
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