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Distributive Policies and Economic Growth: An Optimal Taxation Approach

In an infinite-horizon endogenous growth model a capital income cum investment subsidy tax is considered to investigate if distribution of income towards the non-accumulated factor of production (labour) retards growth and if capital income taxes are bad instruments to finance investment subsidies. The paper identifies conditions under which the tax scheme is better for growth than other distorting tax schemes. In the model a pro-labour government acts growth maximizing and distributing income towards labour raises growth. A pro-capital government's preferred policy is not growth maximizing under the tax scheme, but may generate higher growth than its optimal policy under other tax schemes.