Working Paper Series
Stefan Fölster and Georgi Trofimov
Does Equality Promote Growth?
Abstract: Several recent articles claim that pre-tax income equality
promotes growth. Equality is argued to dampen demand for redistributive
economic policies that tax returns to growth-enhancing activities such as
investment. These results rest heavily on the assumption that pre-tax
income equality is an exogenous parameter. We suggest that taking account
of endogenous influences on pre-tax income equality changes both
theoretical and empirical conclusions significantly. First, we extend
previous theoretical models by letting income equality be endogenously
determined. This leads to the conclusion that equality does not cause
growth, although there may be a positive or negative correlation. Second,
it is shown that previously reported positive empirical relationships
between equality and growth turn insignificant or weakly negative when the
omitted variables suggested by our model are taken into account.
Keywords: TAX POLICY; ECONOMIC GROWTH; INVESTMENTS; (follow links to similar papers)
JEL-Codes: H20; H21; O40; O40; (follow links to similar papers)
42 pages, May 1996
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