A Positive Theory of Economic Growth and the Distrbution of Income

29 Pages Posted: 24 Jul 2014

See all articles by Allan H. Meltzer

Allan H. Meltzer

Carnegie Mellon University - David A. Tepper School of Business

Scott F. Richard

University of Pennsylvania - The Wharton School

Multiple version iconThere are 3 versions of this paper

Date Written: October 10, 2014

Abstract

This paper builds on our earlier work, Meltzer and Richard (1981), on the size of government. How does the distribution of income changes as an economy grows? To answer this question we build a model of a labor economy in which consumers have diverse productivity. The government imposes a linear income tax which funds equal per capita redistribution. The tax rate is set in a single issue election in which the median productivity individual is decisive. Economic growth is the result of using a learning by doing technology, so higher taxes discourage labor causing the growth rate of the economy to fall. We consider two economic scenarios. First, in a developing economy the median voter chooses increasing taxes and increasing redistribution which causes the growth rate of the economy to recede from a high level as the economy matures. The increasing tax rate discourages labor and growth causing the distribution of pre-tax income to widen. Second, in a mature economy, the distribution of productivity can widen due to increased technological specialization. This causes voters to raise the equilibrium tax rate and reduce growth. The distribution of pre-tax income widens. We estimate the model using U.S. data from 1967 - 2011 with excellent results.

Keywords: distribution of income

Suggested Citation

Meltzer, Allan H. and Richard, Scott F., A Positive Theory of Economic Growth and the Distrbution of Income (October 10, 2014). The Wharton School Research Paper No. 67, Available at SSRN: https://ssrn.com/abstract=2470650

Allan H. Meltzer (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2282 (Phone)
412-268-7057 (Fax)

Scott F. Richard

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
116
Abstract Views
619
rank
208,424
PlumX Metrics