Economic growth and Income inequality: the role of fiscal policies

This paper examines the impact of different instruments of fiscal policy on economic growth and income inequality. We use an unbalanced panel of 43 upper-middle and high income countries for the period 1972–2006 to assess the incidence of different fiscal policies. The empirical results show that larger current expenditures and direct taxes diminish economic growth and reduce inequality, while increases on public investment reduces inequality without harming output. This suggests that the tradeoff between efficiency and equity facing governments when designing their fiscal policies may be avoided.