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Income Skewness, Redistribution and Growth: A Reconciliation

  • Carl-Johan Dalgaard

    (Institute of Economics, University of Copenhagen)

  • Henrik Hansen

    (Institute of Economics, University of Copenhagen)

  • Theo Larsen

    (World Bank)

The so-called “fiscal policy approach" predicts that increases in income skewness should be associated with an intensification of redistributive efforts, at least in democracies. If redistribution is detrimental to growth, then this implies that a poor middle class is bad for long-run productivity; a prediction which has found empirical support. However, cross-country studies tend to find a negative association between income skewness and the amount of redistribution taking place, and, a positive relationship between redistributive taxation and growth. This paper offers a reconciliation of the existing theory and these puzzling findings. Specifically, the model predicts that the traditionally stipulated chains of causality holds within countries, whereas the puzzling correlations mentioned above may arise across countries. We provide a test of our explanation and find support for our approach using data on income taxes, taxes on property and expenditures on education.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 03-14.

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Length: 36 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:kud:epruwp:03-14
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  1. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
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  4. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
  5. Perotti, Roberto, 1994. "Income distribution and investment," European Economic Review, Elsevier, vol. 38(3-4), pages 827-835, April.
  6. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
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  8. Giuseppe Bertola, 1991. "Factor Shares and Savings in Endogenous Growth," NBER Working Papers 3851, National Bureau of Economic Research, Inc.
  9. Milanovic, Branko, 2000. "The median-voter hypothesis, income inequality, and income redistribution: an empirical test with the required data," European Journal of Political Economy, Elsevier, vol. 16(3), pages 367-410, September.
  10. Clarke, George R. G., 1992. "More evidence on income distribution and growth," Policy Research Working Paper Series 1064, The World Bank.
  11. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  12. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
  13. Sala-i-Martin, Xavier X, 1996. " A Positive Theory of Social Security," Journal of Economic Growth, Springer, vol. 1(2), pages 2a77-304, June.
  14. Li, Hongyi & Squire, Lyn & Zou, Heng-fu, 1998. "Explaining International and Intertemporal Variations in Income Inequality," Economic Journal, Royal Economic Society, vol. 108(446), pages 26-43, January.
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  16. Leslie G. Godfrey, 1999. "Instrument Relevance in Multivariate Linear Models," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 550-552, August.
  17. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  18. repec:umd:umdeco:rodriguez9902 is not listed on IDEAS
  19. Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 755-76, October.
  20. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  21. Lee, Woojin & Roemer, John E., 1999. "Inequality and redistribution revisited," Economics Letters, Elsevier, vol. 65(3), pages 339-346, December.
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