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Income Inequality and Economic Growth

Author

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  • Shin, Inyong
Abstract
Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible -- that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices -- rapid economic growth and low income inequality -- can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.

Suggested Citation

  • Shin, Inyong, 2008. "Income Inequality and Economic Growth," MPRA Paper 24397, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24397
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    More about this item

    Keywords

    Income Inequality; Economic Growth; Progressive Tax;
    All these keywords.

    JEL classification:

    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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