Dynamic effects of taxation in an unequal Schumpeterian economy

Angus Chu, Chih-Hsing Liao and Pietro Peretto

MPRA Paper from University Library of Munich, Germany

Abstract: How does taxation affect growth and inequality? We develop a Schumpeterian model with wealth heterogeneity, which influences the effects of tax policy. Our model features iso-elastic utility on leisure under which the change in consumption dispersion across heterogeneous households may cause a novel positive effect of labor income tax on employment in addition to the usual negative effect, which together yield an overall ambiguous effect. A negative (positive) effect on employment causes a negative (positive) effect on growth and innovation in the short run and also a negative (positive) effect on the real interest rate, which determines asset income. Consequently, labor income tax has an ambiguous effect on gross income inequality but unambiguously increases consumption inequality by reducing disposable wage income. Therefore, its effects on income inequality and consumption inequality are drastically different. We also calibrate the model to examine its quantitative implications.

Keywords: taxation; innovation; inequality; economic growth (search for similar items in EconPapers)
JEL-codes: O23 O3 O4 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:122219

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