Economic growth and inequality tradeoffs under progressive taxation

Fernando Moraes Carneiro, Stephen J Turnovsky and Octavio Augusto Tourinho

Journal of Economic Dynamics and Control, 2022, vol. 143, issue C

Abstract: This paper examines the sensitivity of the growth-inequality tradeoff to the progressivity of the tax structure. Using an endogenous growth model calibrated to approximate the US tax structure, we simulate a 5% reduction in the economy-wide average tax rate attained by alternative combinations of a reduction in the base tax rate and an increase in progressivity. In all cases the dynamic responses across income classes are diverse. With fixed progressivity the tax benefits favor the poorer quintiles, but the richest quintile is the only group that increases its relative share of capital and income. The net long-run effect is a mild increase in the overall growth rate, accompanied by a substantial increase in inequality. Restructuring the tax cut by allowing a larger reduction in the base tax rate coupled with a large increase in progressivity, designed to maintain the tax burden on the richest quintile unchanged, the exact opposite responses emerge; growth and inequality both decline. By judicious choice of the crucial fiscal parameters, the tax cut can be structured so that the growth rate increases while inequality simultaneously declines. The required structural changes are small, highlighting the extreme sensitivity of the tradeoff to the degree of tax progressivity.

Keywords: Progressive taxation; Growth models; Inequality; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D31 D58 H24 O1 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188922002172
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922002172

DOI: 10.1016/j.jedc.2022.104513

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().