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Rising Income Inequality in OECD Countries: Does Fiscal Policy Sacrifice Economic Growth in Achieving Equity?

Chandika Gunasinghe (), E. A. Selvanathan (), Athula Naranpanawa and John Forster ()
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Chandika Gunasinghe: University of Ruhuna
E. A. Selvanathan: Griffith University
John Forster: Griffith University

The European Journal of Development Research, 2021, vol. 33, issue 6, No 18, 1840-1876

Abstract: Abstract The impact of fiscal policy variables on economic growth and income inequality is estimated with data from a balanced panel of 19 high-income OECD countries for 1995–2015. A simultaneous equations model is estimated to test four hypotheses that link economic growth and income inequality to different components of fiscal policy under debt- and tax-financed fiscal strategies. The results do not provide statistically significant evidence for efficiency–equity trade-off. Regardless of the finance method, an increase in redistributive expenditures reduces income inequality but does not affect economic growth. The overall net impact of non-redistributive expenditures, direct taxation receipts and indirect taxation receipts is the increased income inequality. These results suggest increasing redistributive expenditures financed by direct taxes as a means of reducing income inequality. In addition, reducing non-redistributive expenditures promotes both efficiency and equity objectives, important for countries which are experiencing structural budget deficits.

Keywords: Fiscal policy; Economic growth; Income inequality; Debt-financing; Tax-financing; Simultaneous equations model; OECD countries (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1057/s41287-020-00322-8

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