ABSTRACT:

Many theoretical models show that redistribution causes low growth. However, cross-country regressions often suggest that growth is positively related to redistribution. This paper analyzes that puzzle in an open economy framework. Among other things it is shown that tax competition and the danger of capital outflows leads optimizing, redistributing governments to pursue high growth, no redistribution policies in technologically similar economies. However, if a redistributing government's economy is technologically superior, it is shown that it may attract foreign owned capital, have relatively higher GDP growth and may redistribute. Both results imply that in a cross-section of countries one would observe a positive association between growth and redistributive transfers.
 
 

Keywords: Growth, Redistribution; Tax Competition; Capital Mobility

JEL Classification: O4, H21, D33, C72, C21, F21
 

E-mail: rehme@hrzpub.tu-darmstadt.de