Progressive Tax and Inequality in a Unionized Economy

In this paper, we develop a heterogeneous‐agent, endogenous growth model of a unionized economy with distinct progressive tax schedules on labor and capital income. With time preference heterogeneity, the effective labor force, balanced growth, and income inequality are endogenously determined, and these interact with each other. A reduction in the degree of progressive labor tax yields a “double‐dividend” in terms of reducing income inequality and boosting economic growth, while capital income progressivity displays the usual growth–inequality trade‐off. Particularly, the double‐dividend effect becomes more pronounced when unionization is declined or trade unions become more wage‐oriented, leading to the so‐called “Cheshire cat” phenomenon.