The Dynamics of Exclusion and Fiscal Conservatism


Review of Economic Dynamics

April 2001, vol. 4, n°2, pp.275-302

Departments: Finance

This paper studies the impact of income inequality on fiscal conservatism when an increase in inequality essentially affects the bottom of the income distribution. It is argued that, contrary to what is generally assumed in the economic literature, inequality will then be associated with less, rather than more, redistributive taxation. Furthermore, if the poor are liquidity constrained then the positive association between inequality and fiscal conservatism will increase the persistence in the dynamics of income distribution and possibly lead to multiple steady states