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Income Inequality and Economic Growth

  • Shin, Inyong

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24397.

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Date of creation: 31 Mar 2008
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Handle: RePEc:pra:mprapa:24397
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