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Can Progressive Taxation Contribute to Economic Development?

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  • Christian E. Weller
  • Manita Rao

Abstract

Financial instability has increased for many economies in the face of greater capital mobility. Eliminating capital flows, especially portfolio investment flows, may reduce volatility, but it could also result in domestic capital constraints. To overcome this dilemma, policymakers may consider alternatives, such as progressive income taxation, that could raise domestic funds. In this paper, the authors combine several macroeconomic data sources to test the link between progressive taxation and economic stability, economic growth, inequality and fiscal policy. Based on data from 1981 to 2002, they find that progressive taxation provides policymakers with the ability to conduct countercyclical fiscal policies, which in turn contributes significantly to economic stability. They find no evidence that progressive taxation adversely affects economic stability by reducing growth. The authors do find that the possibility of raising progressivity is constrained by capital mobility and by the level of government spending. And policymakers, who may consider consumption taxes such as the value added taxes (VAT), when tax enforcement is ineffective, would see no additional gains in terms of economic stability from the implementation of a VAT in combination with progressive income taxation.

Suggested Citation

  • Christian E. Weller & Manita Rao, 2008. "Can Progressive Taxation Contribute to Economic Development?," Working Papers wp176, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp176
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    References listed on IDEAS

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    Cited by:

    1. Martorano, Bruno, 2016. "Taxation and inequality in developing countries - Lessons from the recent experience of Latin America," Working Papers 12799, Institute of Development Studies, International Centre for Tax and Development.
    2. Dobrota Gabriela, 2012. "Correlations Between Fiscal - Budgetary Policy And The Economic Development In Romania," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 3, pages 98-103, September.
    3. repec:cbu:jrnlec:y:2013:v:6:p:44-49 is not listed on IDEAS

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