Income Inequality, Tax Policy, and Economic Growth
The Economic Journal, Forthcoming
63 Pages Posted: 17 Apr 2015 Last revised: 4 Jan 2017
Date Written: January 3, 2017
We investigate how the reduction of income inequality through tax policy affects economic growth. Taxation at different points of the income distribution has heterogeneous impacts on households' incentives to work, invest, and consume. Using U.S. state-level data and micro-level household tax returns over the last three decades, we find that reducing income inequality between low and median income households improves economic growth. However, reducing income inequality through taxation between median and high-income households reduces economic growth. These asymmetric economic growth effects are attributable both to supply-side factors (i.e., changes in small business activity and labour supply) and to consumption demand.
Keywords: Income Inequality, Tax Policy, Economic Growth
JEL Classification: E02, H02, H03
Suggested Citation: Suggested Citation