Consumption, Income Distribution and Taxation: Keynes’ Fiscal Policy

Abstract

The General Theory argued that income distribution affected consumption. Greater income inequality put more money into the hands of people with higher MPCs, leading to increased consumption; and inequality had the reverse impact. Yet, of the six objective factors that Keynes identified as affecting consumption, only distribution has failed to become part of the mainstream consumption theory. This paper examines the reasons why this is so, and then develops a model incorporating the after-tax distribution into a Keynesian consumption function. Empirical tests of this model find that after-tax income distribution is a significant determinant of consumption.