Income Inequality, Taxation, and Growth
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.
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