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Redistributive Tax and Growth in a Model with Discrete Occupational Choice

  • Bandyopadhyay, Debasis
  • Basu, Parantap

An optimal redistributive tax-subsidy formula is derived for a growth model where income inequality is endogenously driven by an adult's choice of occupation between work and management. Investment in human capital is the engine of growth. The world's stock of exploitable knowledge as well as the economy's average human capital determines the potential rate of return from investment in human capital in an economy. How much available knowledge would be exploited in the economy depends on the proportion of innovators in our model. A redistributive tax reform impacts growth as well as income inequality via its influence over the occupational choice. The optimal redistributive tax rate is path-dependent in the sense that it depends on the initial wealth distribution. The normative implication of the model is that the optimal capital income tax rate could very well be positive if the initial wealth inequality exceeds a threshold. The optimal capital income tax rate depends inversely on the initial wealth inequality. Copyright 2001 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

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Article provided by Wiley Blackwell in its journal Australian Economic Papers.

Volume (Year): 40 (2001)
Issue (Month): 2 (June)
Pages: 111-32

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Handle: RePEc:bla:ausecp:v:40:y:2001:i:2:p:111-32
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  1. Galor, Oded & Tsiddon, Daniel, 1997. "Technological Progress, Mobility, and Economic Growth," American Economic Review, American Economic Association, vol. 87(3), pages 363-82, June.
  2. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  3. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
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