Can taxes raise output and reduce inequality? The case of lobbying

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...

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Bibliographic Details
Published in:Scottish journal of political economy 2020-11, Vol.67 (5), p.455-461
Main Authors: Prettner, Klaus, Rostam‐Afschar, Davud
Format: Article
Language:English
Subjects:
Economic growth
equity‐efficiency trade‐off
GDP
Gross Domestic Product
Inequality
Lobbying
Policy making
Rent-seeking
Taxation
Taxes
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Summary: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.
ISSN:1467-9485
0036-9292
1467-9485
DOI:10.1111/sjpe.12248