326
MORE EQUAL
SOCIETIES
GROW FASTER
INEQUALITY AND GROWTH
F
or much of the 20th
century economists asked
themselves how economic
growth affects people’s incomes.
Does growth increase or decrease
income inequality? In 1994, Italian
economist Alberto Alesina and
Turkish economist Dani Rodrik
turned the question on its head. They
wondered how income distribution
affects economic growth.
Alesina and Rodrik examined
two factors in their model: labor
and capital (accumulated wealth).
They argued that economic growth
is fueled by growth in total capital,
but government services are funded
by a tax on capital. This means the
higher the taxes on accumulated
wealth, the less incentive there will
be to accumulate capital, and the
lower the growth rate of the
economy will be.
Those whose income derives
mostly from accumulated capital
prefer a lower tax rate. On the
other hand an individual who
has no accumulated wealth, and
whose income derives entirely from
his labor, tends to prefer a higher tax
rate. This will provide him
with public services and allows
for a better redistribution
of accumulated wealth.IN CONTEXT
FOCUS
Growth and developmentKEY THINKERS
Alberto Alesina (1957– )
Dani Rodrik (1957– )BEFORE
1955 US economist
Simon Kuznets publishes
Economic Growth and Income
Inequality, which concludes
that inequality is a side effect
of growth.1989 US economists Kevin
Murphy, Andrei Shleifer, and
Robert Vishny claim income
distribution affects demand.AFTER
1996 Italian economist
Roberto Perrotti claims that
there is no link between lower
taxes and higher growth.2007 Spanish economist
Xavier Sala-i-Martin argues
that growing economies have
reduced inequality.Wealth is divided
inequitably through society.Those without
accumulated capital
become dissatisfied...But redistribution is paid
for through higher taxes on
accumulated capital...... and higher taxes slow
economic growth.More equal societies
grow faster.... and call for more
redistributive policies
from the government.