Progressive Tax and Inequality in a Unionized Economy*

Abstract

In this paper, we develop a heterogeneous‐agent, endogenous growth model of a unionized economy with distinct progressive tax schedules on labor and capital income. With time preference heterogeneity, the effective labor force, balanced growth, and income inequality are endogenously determined, and these interact with each other. A reduction in the degree of progressive labor tax yields a “double‐dividend” in terms of reducing income inequality and boosting economic growth, while capital income progressivity displays the usual growth–inequality trade‐off. Particularly, the double‐dividend effect becomes more pronounced when unionization is declined or trade unions become more wage‐oriented, leading to the so‐called “Cheshire cat” phenomenon.

Examining the Relationship between Income Inequality and Growth from the Perspective of EU Member States’ Stage of Development

“…Of course, this effect is valid in the case of the existence of a system of progressive taxation or of a system of social transfers, which is oriented toward social inclusion. Moreover, Huang et al concluded that an increase in the progressivity of labour income tax facilitates a rise in the economic growth rate and a fall in income disparities [15]. The authors also assessed the consequences of increasing capital income tax progressivity and found that, usually, this is associated with a fall in both income inequality and economic growth.…”