Two-way relationship between inequality and growth within fiscal policy channel: an empirical assessment for European countries

We investigate the role of fiscal policy, through several measures of government revenues and expenditures and redistribution, on disposable and market income inequality and economic growth as well as the interaction between inequality and growth for 31 European countries from 1995 to 2019. In this article, we employ SUR regressions and SEM models, and we conclude that: i) while post-tax and transfers inequality has a negative impact on public expenditure variables and redistribution, pre-tax and transfers inequality has a positive impact; ii) public expenditure variables and direct taxation negatively influence economic growth; iii) average post-tax and transfers inequality has a negative effect on growth and average pre-tax and transfers inequality has a positive impact; iv) growth contributes to the reduction of average post-tax and transfers inequality and to the increase in average pre-tax and transfers inequality; and v) fiscal policy allows for the attenuation of disposable income inequality. The different results between the role of pre and post-tax and transfers inequality levels lead us to suggest tax progressivity as an important feature to take into account when analyse the trivariate relationship between fiscal policy, growth, and inequalities.