Do inequality and fiscal redistribution matter when credit bites back?

Michal Škára and Ladislava Issever Grochová

No 2025-108, MENDELU Working Papers in Business and Economics from Mendel University in Brno, Faculty of Business and Economics

Abstract: This paper examines the relationship between household debt and economic output in the context of income inequality, emphasizing the role of fiscal redistribution through personal taxes and social transfers. Based on an unbalanced panel dataset of 36 countries covering the period 1980–2023, the study employs panel local projection (LP) methods to analyze the dynamic effects of household debt on GDP growth, assessing how this effect is influenced by the degree of income redistribution achieved through the tax system and transfers. While existing research shows that household debt may initially stimulate economic activity, it constrains consumption and exacerbates downturns in the medium run, especially in economies with high inequality. The results suggest that fiscal redistribution dampens the negative effects of household debt associated with inequality, with the strongest mitigating impact observed at the seventh horizon after a debt shock, when debt-service burdens peak. The findings underline the importance of an effective system of fiscal redistribution – encompassing both personal taxes and transfers – in reducing the macroeconomic costs of household indebtedness and contributing to the debate on sustainable growth and inequality reduction.

Keywords: Income inequality; direct taxes; GDP growth; household debt (search for similar items in EconPapers)
JEL-codes: D14 D31 E21 E62 H24 (search for similar items in EconPapers)
Pages: 32
Date: 2025-11
New Economics Papers: this item is included in nep-fdg, nep-inv and nep-tra
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