Progressive Taxation and Long-Run Income Inequality under Endogenous Growth

Juin-Jen Chang (), Jang-Ting Guo () and Wei-Neng Wang ()
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Juin-Jen Chang: Academia Sinica,
Jang-Ting Guo: Department of Economics, University of California Riverside
Wei-Neng Wang: National Taichung University of Science and Technology

No 202503, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper examines the theoretical and quantitative interrelations between progressive taxation and after-tax income inequality within a one-sector endogenous growth model. In a simplified two-type version of the macroeconomy, we analytically show that higher fiscal progression leads to less unequal long-run gross/net income distributions, provided the general-equilibrium elasticity of aggregate labor supply surpasses a specific negative threshold. In addition, numerical simulations find that our calibrated economy under useless or useful government spending, together with (i) agents' intertemporal elasticity of consumption substitution taking on the highest empirically-plausible value and (ii) a lower-than-unitary elasticity of capital-labor substitution in production, is able to generate qualitatively as well as quantitatively realistic long-run disposable-income inequality effects of changing the tax progressivity vis-Ã -vis recent panel estimation results.

Keywords: Progressive Taxation; Income Inequality; Endogenous Growth. (search for similar items in EconPapers)
JEL-codes: D31 E13 H30 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-dge, nep-gro, nep-pbe and nep-pub
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