The relationship between income inequality and economic growth is one of the controversial issues in macroeconomics. In this paper, we investigate a dynamic relationship between income inequality and economic growth in a simple model of endogenous growth with heterogenous households, progressive taxation, and a productive public spending.
We show that the relationship between inequality and growth depends on the initial distribution of income. Starting from a Marxian economy, the relationship is negative. On the other hand, starting from a fundamentally unequal economy, the relationship is at first negative and then positive in the process of income convergence. The welfare effect of progressive taxation and the implication to the growth regression puzzle are also discussed.
Abstract:
JEL Classification : D31, E62, H21, O41