Question

Do higher tax rates on the rich retard economic growth and what effect if any a more progressive tax structure has on income distribution.

Answer 1

Only low corporate and personal income taxation boost growth while higher rates slow growth. While the personal income tax result is less stable, the corporate tax rate results are robust across specifications and variable selection. Furthermore, taxing dividends that has a negative impact on economic growth, although this result is also less robust for the corporate tax rate.

Higher inequality can delay growth in the early stages of economic development and can foster growth in a near-stable state; (ii) redistribution of income by high income tax does not always reduce income inequality. Income inequality can be minimized in a near-stable state through higher income tax, but it can not be reduced in the early stage of economic development, and (iii) two government policies–rapid economic growth and low income inequality –can be accomplished by low income tax in the early stage of economic development, but both can not be achieved simultaneously in a near-stable state.

In the context of the trade-offs between growth and equity, the effects of taxation on income distribution need to be seen, and this means looking at the overall effects of any reform on the fiscal regime as a whole, and not just whether individual taxes are progressive or regressive. This is because the allocation of disposable income relies on taxation as well as benefits. For example, raising indirect taxes is often regressive where these taxes fall on the consumption of goods and services that make up a larger proportion of poorer households ' budgets than richer ones. But if these consequences are offset by other taxes and benefits, the overall impact of a fiscal change can still be progressive