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Redistributive Tax and Growth in a Model with Discrete Occupational Choice

Debasis Bandyopadhyay and Parantap Basu

Australian Economic Papers, 2001, vol. 40, issue 2, 111-132

Abstract: An optimal redistributive tax‐subsidy formula is derived for a growth model where income inequality is endogenously driven by an adult's choice of occupation between work and management. Investment in human capital is the engine of growth. The world's stock of exploitable knowledge as well as the economy's average human capital determine the potential rate of return from investment in human capital in an economy. How much available knowledge would be exploited in the economy depends on the proportion of innovators in our model. A redistributive tax reform impacts growth as well as income inequality via its influence over the occupational choice. The optimal redistributive tax rate is path‐dependent in the sense that it depends on the initial wealth distribution. The normative implication of the model is that the optimal capital income tax rate could very well be positive if the initial wealth inequality exceeds a threshold. The optimal capital income tax rate depends inversely on the initial wealth inequality.

Date: 2001
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Working Paper: Redistributive Tax and Growth in a Model with Discrete Occupation choice (1999) Downloads
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