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Income Inequality, Taxation, and Growth

Author

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  • Kula, Maria C.

    (Brown University)

  • Millimet, Daniel L.

    (Southern Methodist University)

Abstract

Several recent papers addressing the role of income distribution in the growth process have focused on the role income inequality plays in the political process. Inequality is linked to pressure for high, redistributionary tax rates, which lead to low investment and therefore growth. Empirically, the correlation between high inequality and low growth has been robust. However, the intermediate step linking inequality to high taxes has not been empirically supported, and the link between taxes and growth has been found to be the opposite of that suggested by theory: an empirically robust relationship has been found between high taxes and growth. This paper presents a simple model which reconciles the intuitively appealing taxation approach to economic growth with these seemingly contradictory empirical findings.

Suggested Citation

  • Kula, Maria C. & Millimet, Daniel L., 1999. "Income Inequality, Taxation, and Growth," Departmental Working Papers 001, Southern Methodist University, Department of Economics.
  • Handle: RePEc:smu:ecowpa:001
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    File URL: ftp://ftp1.economics.smu.edu/WorkingPapers/1999/millimet/ineq14.pdf
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    References listed on IDEAS

    as
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    6. Roberto Perotti, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 755-776.
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    8. Branko Milanovic, 2003. "The median voter hypothesis, income inequality and income," HEW 0305001, EconWPA.
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    14. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    15. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed the Labor Market?," The Quarterly Journal of Economics, Oxford University Press, vol. 113(4), pages 1169-1213.
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    Cited by:

    1. Lambert, Peter J. & Millimet, Daniel L. & Slottje, Daniel, 2003. "Inequality aversion and the natural rate of subjective inequality," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1061-1090, May.

    More about this item

    Keywords

    Income Inequality; Fiscal Policy; Growth; Time Inconsistency;

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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