The impact of inequality on growth: a vector error correction model approach for the United States and France

Abstract

This work aims to identify the impact of an increase in inequality on long-term growth. Unlike other studies related to the topic that rely on a very general index like the Gini coefficient, this analysis uses annual data on the percentage of total income held by the top 1% as a proxy for inequality. The analysis is conducted using a Vector Error Correction Model (VECM) for France and the United States, both of which have data series spanning over 100 years. It is found that an increase in this measure of inequality has a negative impact on both countries, even when varying the lags. In additional results, it is found that the taxes levied on the richest 1% appear to have an effect not statistically different from zero in both countries, aligning with the recent literature that has emerged in this area.