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Inequality and Growth in the 21st Century

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  • Weijie Luo

Abstract

This paper distinguishes between income inequality induced by differences in labor productivity and induced by differences in capital income. Persson and Tabellini (1994) argue that productivity-induced income inequality leads to lower growth since distortionary taxes increase and harm capital accumulation. However, if income inequality stems from differences in capital income, then labor tax rates fall, leading to higher growth. Using OECD data, increased capital income inequality (proxied by the top 1% income share) has a significant positive relationship with subsequent economic growth. Controlling for capital income inequality yields a negative relationship between labor income inequality and growth, as originally conjectured.

Suggested Citation

  • Weijie Luo, 2017. "Inequality and Growth in the 21st Century," Discussion Papers 17/18, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:17/18
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    References listed on IDEAS

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    More about this item

    Keywords

    capital income; inequality; growth;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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