Reexamination of Economic Growth, Tax Policy, and Distributive Politics

Yong Bao and Jang-Ting Guo

Review of Development Economics, 2004, vol. 8, issue 3, 474-482

Abstract: The paper examines the relationship between economic growth, tax policy, and distribution of capital and labor ownership in a one‐sector political‐economy model of endogenous growth with productive government spending financed by a proportional tax on capital income. The analysis shows that inequality in wealth and income can be positively or negatively related to the optimal tax rate. In either environment, higher inequality leads to a lower after‐tax return to capital, thereby reducing the economy's growth rate.

Date: 2004
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