Fiscal opacity and reduction of income inequality through taxation: Effects on economic growth

Abstract

We analyze the effect of fiscal opacity regarding the budget deficit and the reduction of income inequality through progressive direct taxation on economic growth. Using a sample of thirteen OECD countries from 1980–2016, we propose fiscal opacity indicators, through signal-to-noise ratios, that reflect the public’s ignorance regarding the budget deficit. Moreover, we calculate contraction factors to consider the income inequality through income taxation of heterogeneous households. The findings show that an increase in fiscal opacity decreases growth and that there is an asymmetric nature of redistributive taxation on economic growth. Furthermore, it is possible to conjecture that fiscal opacity can amplify income inequality’s asymmetric effect on growth.