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Income Inequality, Tax Policy, and Economic Growth

We investigate how reduction of income inequality through tax policy affects economic growth. Taxation at different points of the income distribution has heterogeneous impacts on households' incentives to invest, work, and consume. Using U.S. state-level data and micro-level household tax returns over the last three decades, we find that reduction of income inequality between low and median income households improves economic growth. However, reduction of income inequality through taxation between median and high income households reduces economic growth. These economic growth effects are attributable both to supply-side factors (changes in small business activity and labor supply) and to consumption demand.

Authors: 
Siddhartha Biswas, University of Chicago
Indraneel Chakraborty, University of Miami
Rong Hai, Becker Friedman Institute
Publication Date: 
May, 2015
Publication Type: