Direct and Indirect Effects of Income Inequality On Economic Growth Through Political Economy
DOI:
https://doi.org/10.25071/1874-6322.40424Keywords:
Economic growth, Inequality, Panel dataAbstract
In addition to its direct effects, income inequality may affect economic
growth indirectly through various transmission channels. Negative effects
may arise from a political economy, socio-political instability, and credit
market imperfections. In other words, inequality may have indirect effects
on economic growth through these transmission channels. In this article,
the focus is on testing the impact of income inequality through the political
economy channel, using several types of taxes as the proxy for redistributive
pressure. In order to test the possible effects through these channels, income
inequality, taxation, and related interaction terms are added into the growth
model. The results show that there is a significant negative interaction
between income inequality and tax channels. This interaction is also
justified with the tax index calculated by the PCA. Marginal effects of the
related tax channels are interpreted for different levels of income inequality.