This paper develops a stylized short-run neo-Kaleckian model incorporating personal income inequality and income taxes based on You and Dutt (1996), targeting an existing gap in the post-Keynesian literature. Accordingly, the main goal here is to investigate how changes in income taxes and personal income distribution affect output growth in the stylized model. In this regard, the first assumption is that the result is primarily dependent on the propensities to consume out of each income quintile, which should be heterogeneous and a decreasing function of the income level (following the Keynesian tradition based on The General Theory) for progressive shifts to be positive (and vice versa). Secondly, this outcome is assumed to be conditioned to the type of relation between overall inequality and aggregate consumption.  In this sense, the stylized model attaches the strictly negative trade-off between aggregate consumption and inequality to the dominance of absolute income effects, confirming the empirical feature of the issue.

The theoretical discussion of the stylized model is then empirically assessed based on data retrieved from the Survey of Household Income and Wealth published by the Bank of Italy. The empirical analysis confirms both the heterogeneity of the propensities to consume of Italian households, as well as validates the dominance of absolute income effects in the Italian consumer behaviour that assures the negative trade-off between inequality and aggregate demand. More specifically, it is shown that, overall, Italians are still income-budget constrained, preventing from a compensation of demand-depressing effects of raising inequality via debt and wealth-based consumption mainly related to financial institutions and norms. Likewise, it is argued that decreasing personal income inequality via progressive income tax reforms and through an institutional shift benefiting wage-earners would have positive effects on aggregate demand, utilization and growth, further boosting the effect of government expenditure (through its impact on the multiplier).