Can Progressive Taxation Contribute to Economic Development?

28 Pages Posted: 10 Nov 2008

See all articles by Christian E. Weller

Christian E. Weller

University of Massachusetts Boston - Department of Public Policy and Public Affairs; University of Massachusetts Boston - Gerontology Institute; Political Economy Research Institute

Manita Rao

affiliation not provided to SSRN

Date Written: July 28, 2008

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.

Keywords: progressive taxation, value added taxes, economic development, financial crises

JEL Classification: F32, F42, F43, O11, O16

Suggested Citation

Weller, Christian E. and Rao, Manita, Can Progressive Taxation Contribute to Economic Development? (July 28, 2008). Available at SSRN: https://ssrn.com/abstract=1298636 or http://dx.doi.org/10.2139/ssrn.1298636

Christian E. Weller (Contact Author)

University of Massachusetts Boston - Department of Public Policy and Public Affairs ( email )

McCormack Graduate School
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HOME PAGE: http://blog.umb.edu/christianweller

University of Massachusetts Boston - Gerontology Institute ( email )

100 Morrissey Boulevard
Boston, MA 02125-3393
United States

Political Economy Research Institute ( email )

Amherst, MA
United States

Manita Rao

affiliation not provided to SSRN ( email )

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