Growth, income inequality, and capital income taxes: evidence from a seemingly unrelated regression model on panel data

It is commonly believed that taxes on capital income are harmful to economic growth but beneficial for decreasing income inequality. This study constructs two equations, a growth equation and an income inequality equation, to empirically examine the actual impact of capital income taxes on growth and income inequality. We employ the seemingly unrelated regressions with fixed effects panel data model and instrumental variable estimation technique. The research sample includes data from OECD countries for the period 1990 to 2013. The empirical results show that capital income taxes exhibit a negative influence on both economic growth and income inequality. Our findings suggest that although capital income taxes hinder economic growth, they achieve the purpose of income redistribution.