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Progressive Taxation and Long-Run Income Inequality under Endogenous Growth

Author

Listed:
  • Juin-Jen Chang

    (Academia Sinica,)

  • Jang-Ting Guo

    (Department of Economics, University of California Riverside)

  • Wei-Neng Wang

    (National Taichung University of Science and Technology)

Abstract

This paper examines the theoretical and quantitative interrelations between progressive taxation and after-tax income inequality within a one-sector endogenous growth model. In a simplified two-type version of the macroeconomy, we analytically show that higher fiscal progression leads to less unequal long-run gross/net income distributions, provided the general-equilibrium elasticity of aggregate labor supply surpasses a specific negative threshold. In addition, numerical simulations find that our calibrated economy under useless or useful government spending, together with (i) agents' intertemporal elasticity of consumption substitution taking on the highest empirically-plausible value and (ii) a lower-than-unitary elasticity of capital-labor substitution in production, is able to generate qualitatively as well as quantitatively realistic long-run disposable-income inequality effects of changing the tax progressivity vis-Ã -vis recent panel estimation results.

Suggested Citation

  • Juin-Jen Chang & Jang-Ting Guo & Wei-Neng Wang, 2025. "Progressive Taxation and Long-Run Income Inequality under Endogenous Growth," Working Papers 202503, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202503
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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