Knowledge Spillover and Growth Promoting Redistribution

Abstract

Redistribution of income turns out to be sometimes essential for fueling long-run growth in a non-political model of endogenous growth with knowledge spillover but without a credit market. As the per capita income grows, income inequality increases but a higher inequality also slows down the income growth rate. If the income inequality exceeds a threshold then to sustain positive economic growth income redistribution would be essential. A redistributive policy that facilitates accumulation and spilllover of knowledge boosts labour productivity and that, in turn, could increase the net profit of the taxpayers, by raising the exchange value of their resources. We characterize the properties of the welfare-maximizing progressivity as a function of the degree of knowledge spillover and provide a range of numerical estimates. Examining their non-linear relationship, we discover that in order to maximize the long-run growth rate, the average marginal income tax rate may be as large as 20%. Also, facilitating the medium of knowledge spillover such as the Internet and income redistribution appear to be complementary up to a point beyond which to promote economic growth, spillover reduces the potential macroeconomic benefits from income redistribution to make it harmful for growth. Our discovery calls for future research on estimating the extent of knowledge spillover for determining the growth-maximising progressivity of income distribution.