Income Inequality, Tax Policy, and Economic Growth

40 Pages Posted: 25 May 2017

See all articles by Siddhartha Biswas

Siddhartha Biswas

University of North Carolina (UNC) - Chapel Hill

Indraneel Chakraborty

University of Miami

Rong Hai

University of Miami - School of Business Administration - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2017

Abstract

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 US 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.

Suggested Citation

Biswas, Siddhartha and Chakraborty, Indraneel and Hai, Rong, Income Inequality, Tax Policy, and Economic Growth (May 2017). The Economic Journal, Vol. 127, Issue 601, pp. 688-727, 2017. Available at SSRN: https://ssrn.com/abstract=2973606 or http://dx.doi.org/10.1111/ecoj.12485

Siddhartha Biswas (Contact Author)

University of North Carolina (UNC) - Chapel Hill ( email )

107 Gardner Hall, CB 3305
University of North Carolina
Chapel Hill, NC 27599
United States

Indraneel Chakraborty

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Rong Hai

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

HOME PAGE: http://https://sites.google.com/site/ronghaiecon/

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