Inequality-growth nexus under progressive income taxation |
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| Affiliation: | 1. Research Institute of Economics and Management, Southwestern University of Finance and Economics;2. Institute of Urban Development, School of Economics, Nanjing Audit University;3. Institute of Economics, Academia Sinica;1. European Central Bank, DG Monetary Policy, Italy;2. Sapienza University of Rome, Italy;1. Lehigh University and DePauw University, 621 Taylor Street, Bethlehem, PA United States;2. Lehigh University, 621 Taylor Street, Bethlehem, PA United States;3. Department of Economics, The University of Texas at Dallas, 800 W. Campbell Rd GR 31, Richardson, TX 75080, United States |
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| Abstract: | Within heterogeneous-household extensions of Romer’s (1986) one-sector representative agent model of endogenous growth, this paper finds that changes made to the U.S. statutory income tax in the past decades account for a substantial portion of the following stylized facts: (i) U.S. income inequality significantly deteriorates since the mid-1980s; (ii) the inequality-growth nexus displays a positive slope before and after the implementation of the Tax Reform Act of 1986 (TRA-86); and (iii) the slope of the inequality-growth nexus sharply declines between the pre- and post-TRA-86-reform periods, indicating less deterioration in real GDP per capita growth when pursuing a more equal income distribution after 1986. In addition to income inequality, the responses of several other measurements of inequality to changes in the tax code parameters are also explored. |
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