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Public Finance, Economic Growth and Inequality: A Survey of the Evidence

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  • Åsa Johansson

Abstract

This paper reviews the key issues concerning the impact of public spending and taxation on long-run growth and inequality and takes stock of existing theoretical and empirical studies. Overall, the evidence highlights that the size of the government matters for long-term growth as a too large government may undermine growth through the cost of financing public spending. A reallocation of public spending towards infrastructure and education would raise income in the long run, whereas increasing social welfare spending can reduce inequality as such spending increases redistribution and risk sharing. Similarly, the available evidence also supports the hypothesis that some taxes are more distortionary than others, with income taxes found to be more harmful for growth than consumption and property taxes. However, a tax shift from income towards consumption taxes has equity implications, since income taxes are generally more progressive than other taxes. The effect of a reallocation of spending and taxes on growth and inequality likely varies across countries depending on country characteristics. Finances publiques, croissance économique et inégalités : Une revue de littérature Ce rapport examine les principales questions liées à l’impact des dépenses publiques et de la fiscalité sur la croissance à long terme et les inégalités, et fait le point sur les études théoriques et empiriques déjà publiées. Il ressort de ces publications que la taille du secteur public exerce une influence sur la croissance à long terme, dans la mesure où un secteur public trop important peut freiner la croissance en raison de la charge financière qu’il représente. La réaffectation des dépenses publiques au financement des infrastructures et de l’éducation peut avoir un effet bénéfique sur le revenu à long terme, tandis que l’augmentation des dépenses allouées à la protection sociale peut contribuer à résorber les inégalités en favorisant la redistribution et la mutualisation des risques. Ces études corroborent en outre l’hypothèse selon laquelle certains impôts génèrent davantage de distorsions que d’autres : il est ainsi attesté que les impôts sur le revenu pèsent davantage sur la croissance que les impôts sur la consommation ou la propriété. Néanmoins, un transfert de la charge fiscale du revenu vers la consommation a des implications en termes d’équité, étant donné que les impôts sur le revenu sont généralement plus progressifs que les autres. Les conséquences qu’aurait, sur la croissance et les inégalités, une réaffectation des dépenses et des impôts varient selon les pays, en fonction des caractéristiques de chacun.

Suggested Citation

  • Åsa Johansson, 2016. "Public Finance, Economic Growth and Inequality: A Survey of the Evidence," OECD Economics Department Working Papers 1346, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1346-en
    DOI: 10.1787/094bdaa5-en
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    2. Oguzhan Akgun & David Bartolini & Boris Cournède, 2017. "The capacity of governments to raise taxes," OECD Economics Department Working Papers 1407, OECD Publishing.
    3. Boris Cournède & Jean-Marc Fournier & Peter Hoeller, 2018. "Public finance structure and inclusive growth," OECD Economic Policy Papers 25, OECD Publishing.
    4. Sanjeev Gupta & João Tovar Jalles, 2020. "Tax Revenue Reforms and Income Distribution in Developing Countries," Working Papers REM 2020/0137, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    5. Debra Bloch & Jean-Marc Fournier & Duarte Gonçalves & Álvaro Pina, 2016. "Trends in Public Finance: Insights from a New Detailed Dataset," OECD Economics Department Working Papers 1345, OECD Publishing.
    6. Debra Bloch & Jean-Marc Fournier, 2018. "The deterioration of the public spending mix during the global financial crisis: Insights from new indicators," OECD Economics Department Working Papers 1465, OECD Publishing.
    7. Oguzhan Akgun & Boris Cournède & Jean-Marc Fournier, 2017. "The effects of the tax mix on inequality and growth," OECD Economics Department Working Papers 1447, OECD Publishing.
    8. David Bauer & Joachim Ragnitz & Christian Ochsner, 2018. "Strategien für die bestmögliche Ausstattung mit und Nutzung von Fördermitteln nach 2020," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 82, October.
    9. António Afonso & João Tovar Jalles & Ana Venâncio, 2021. "Taxation and Public Spending Efficiency: An International Comparison," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(3), pages 356-383, September.
    10. Keith Fitzgerald & Jacopo Bedogni, 2019. "Examining the Volatility of Ireland’s Tax Base in the Paradigm of Modern Portfolio Theory," The Economic and Social Review, Economic and Social Studies, vol. 50(3), pages 429-458.
    11. António Afonso & João Tovar Jalles & Ana Venâncio, 2021. "Structural Tax Reforms and Public Spending Efficiency," Open Economies Review, Springer, vol. 32(5), pages 1017-1061, November.
    12. Christophe André & Hyunjeong Hwang, 2018. "Tax reform to support growth and employment in Finland," OECD Economics Department Working Papers 1468, OECD Publishing.
    13. Pedro Bação & Marta Simões, 2020. "Is the Welfare State Relevant for Economic Growth? Evidence for Portugal," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 494-520, September.
    14. Alessi, Lucia & Benczur, Peter & Campolongo, Francesca & Cariboni, Jessica & Manca, Anna Rita & Menyhert, Balint & Pagano, Andrea, 2018. "The resilience of EU Member States to the financial and economic crisis. What are the characteristics of resilient behaviour?," JRC Research Reports JRC111606, Joint Research Centre (Seville site).
    15. Pedro Bação & Marta Simões, 0. "Is the Welfare State Relevant for Economic Growth? Evidence for Portugal," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 0, pages 1-27.
    16. David Bauer & Joachim Ragnitz, 2018. "Schrumpfung von EU-Mitteln nach 2020: Herausforderungen für die sächsische Förderpolitik," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 25(03), pages 14-19, June.
    17. Jean-Marc Fournier & Åsa Johansson, 2016. "The Effect of the Size and the Mix of Public Spending on Growth and Inequality," OECD Economics Department Working Papers 1344, OECD Publishing.
    18. José Alves & António Afonso, 2019. "Tax structure for consumption and income inequality: an empirical assessment," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 337-364, November.

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    More about this item

    Keywords

    economic growth; fiscal policy; income inequality; Public spending; taxation;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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