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Income inequality and economic growth

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  • Shin, Inyong

Abstract

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.

Suggested Citation

  • Shin, Inyong, 2012. "Income inequality and economic growth," Economic Modelling, Elsevier, vol. 29(5), pages 2049-2057.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:2049-2057
    DOI: 10.1016/j.econmod.2012.02.011
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    More about this item

    Keywords

    Income inequality; Economic growth; Progressive tax; Transition dynamics; Asset distribution;

    JEL classification:

    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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