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Taxation and Income Distribution Dynamics in a Neoclassical Growth Model
Author(s) -
GARCÍAPEÑALOSA CECILIA,
TURNOVSKY STEPHEN J.
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00458.x
Subject(s) - economics , affect (linguistics) , endogeneity , distribution (mathematics) , capital income , labour economics , income distribution , growth model , income tax , government (linguistics) , work (physics) , monetary economics , international taxation , macroeconomics , public economics , tax reform , inequality , econometrics , mathematical analysis , philosophy , linguistics , mathematics , mechanical engineering , engineering
We examine how changes in tax policies affect the dynamics of the distributions of wealth and income in a Ramsey model in which agents differ in their initial capital endowments. The endogeneity of the labor supply plays a crucial role, as tax changes that affect hours of work will affect the distribution of wealth and income, reinforcing or offsetting the direct redistributive impact of taxes. We consider different ways of financing government expenditure and find that policies that reduce the labor supply are associated with lower output but also with a more equal distribution of after‐tax income. We illustrate these effects by examining the impact of recent tax changes observed in the United States and in European economies.