Income Inequality, Tax Policy, and Economic Growth

Siddhartha Biswas, Indraneel Chakraborty, Rong Hai

Research output: Contribution to journalArticle

8 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)688-727
Number of pages40
JournalEconomic Journal
Volume127
Issue number601
DOIs
StatePublished - May 1 2017

ASJC Scopus subject areas

  • Economics and Econometrics

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