Income inequality and economic growth

Abstract According to the increasing marginal tendency towards tax avoidance, we develop a macro theoretical model and derive an optimal path of economic growth using only dimensionless parameters, which illustrates an inverted U ‐shaped effect of income inequality on economic growth in the long run. Specifically, economic growth initially moves upwards and subsequently downwards as the Gini coefficient increases. Moreover, this study presents empirical evidence via dynamic GMM estimates based on instrumental variables and PMG estimates relying on cointegration analyses, consistent with the implications of our theoretical model.