Income taxation and capital accumulation

Progressive income taxation improves the relative consumption of the ill-endowed, but it may tend to reduce overall consumption by reducing the aggregate propensity to save and the capital-output ratio. This distinction between short- and long-run effects of progressive taxation parallels with the distinction between intragenerational and intergenerational equity. The possible conflict between these considerations, not unfamiliar in the literature on economic development, is analyzed here by means of a one-sector neoclassical growth model with the following features (Section II).