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Can taxes raise output and reduce inequality? The case of lobbying
Author(s) -
Prettner Klaus,
RostamAfschar Davud
Publication year - 2020
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12248
Subject(s) - economics , per capita , gross domestic product , consumption (sociology) , inequality , production (economics) , monetary economics , macroeconomics , public economics , mathematical analysis , mathematics , population , social science , demography , sociology
One of the key institutional elements for reducing inequality is the tax and transfer system. However, economists and policymakers usually view high taxes as detrimental to economic growth. We isolate one important mechanism by which higher taxes reduce inequality and raise per capita gross domestic product (GDP) at the same time. This mechanism operates in the presence of unproductive lobbying. Higher taxes induce a reallocation from lobbying toward production. This raises overall output and reduces the consumption gap between those who benefit from lobbying and those who bear its negative effects.